The Rural Payments Agency is to spend £40m on a recovery plan including a series of upgrades to its computer systems after major IT problems caused delays in paying subsidies to farmers.

A National Audit Office (NAO) report today said the agency had already changed from a failed "task-based" approach processing different stages of claims, to a "whole case working" approach enabling staff to track individual claims.

The change required workarounds because the system was not designed for whole case working, some of which were not in place in time to make this year's payments.

The report said the agency met the June 2007 deadline for payouts under the 2006 scheme but has not yet made up the difference to farmers paid too little last year, and had repeated mistakes resulting in £6.8m in overpayments for 2005 in those for 2006, as well as underpayments totalling £19.3m.

Nearly £300m has been set aside to meet potential penalties from Brussels as a result.

The report said the 2005-06 failures were due to considerable difficulties capturing and processing information about farmers' land areas as well as a computer system that was "slow and unreliable".

But it succeeded in processing 98 per cent by value of payments for 2006 due to be made this year.

The NAO said implementing the changes needed to business processes and the enhancements to computer systems needed to support them "remains challenging" and warned there will be little room for manoeuvre if Brussels imposes changes to the scheme.

The report praised the "clearer sense of direction" from the agency's new management.