A long-running dispute between HM Revenue and Customs (HMRC) and EDS over the introduction of a tax credits computer system has ended with the US supplier settling to pay the government £26.5m.

HMRC came to an agreement with EDS in November 2005 that the vendor would pay £71.25m in compensation for the IT problems associated with the introduction of tax credits.

Slow-running software caused massive backlogs of tax credit applications when the system was introduced in 2003, and miscalculations resulted in overpayments totalling £1.9bn in the first year.

It was agreed in 2005 that EDS would pay quarterly instalments of 4.5 per cent of income from future government work over three years.

But last year MPs on the Public Accounts Committee said that EDS had not paid enough to HMRC, and recommended fresh legal action to recover the total if it had not been paid by the end of 2008, estimating that it would take 106 years for EDS to pay what it owed the government at the current rate.

EDS this week decided to settle the matter with a one-off lump sum. The company was acquired by HP last year.