When IT supplier EDS lost out on its lucrative £3bn contract with HM Revenue & Customs, Capgemini took on the onerous responsibility of getting the department’s ailing systems on track.

Getting on track, it seems, has been achieved to a certain degree with tax advisers experiencing fewer problems working electronically with HMRC in recent times.

But a new report by the National Audit Office shows that sweeteners paid to businesses to ensure a smooth transition from one to the other could have gone too far. With Capgemini paid £37.6m and EDS £5.7m, the NAO report says: ‘there remains a question whether the department needed to pay this much’. It appears that another price has been paid to ensure smoother service.

With a number of massive projects to undertake, including the preparation of the construction industry scheme, tax credits scheme and modernising PAYE, budgets for the first year of the ten-year deal were busted; £539m to June 2005, compared to an estimated figure of £384m.

The NAO warns that current spending would see the final cost of the contract in excess of £6bn, rather than the projected £3bn to £4bn. Yet projected declining staff numbers and increased use of electronic delivery sees HMRC estimate this level of cost will not be sustained. There are lessons to be learned, says the NAO and concerns for the future.

To avoid IT project delays the NAO has called for not many ongoing crucial projects to be underway at any one time, which could put too much pressure on a potential new IT supplier. The sheer scale of the contract, which now encompasses both the Inland Revenue and Customs & Excise IT, could make a barrier to effective competition for the tender.

And despite concerns over the incentives made to Capgemini and EDS, the NAO concedes that to achieve effective competition this type of approach will have to be considered.