EDS is to pay HM Revenue & Customs £71m to settle its dispute over the tax credits row.

HMRC has been in dispute with the IT supplier since July of 2003 over the system it supplied, and had earlier this year indicated an intention to go to court to fight the claim.

Talks to settle the issue came to a head recently, however. A court action would have held dangers for both sides, with ministers likely to have been unwilling to explain their actions in court, and EDS unwilling to continue its dispute with the government, a key client.

The exact value of the settlement is £71.25m.

HMRC chairman David Varney said: 'We have achieved a settlement of this complex dispute with EDS agreeing to pay compensation. The tax credits IT problems had an adverse impact on many tax credits claimants. We were determined to reach a fair settlement for the taxpayer, and I believe that has now been achieved.'

In a statement to the press, EDS said is was pleased to have reached a settlement.

'We were always focused on reaching an equitable settlement, said Doug Hoover, EDS managing director for the UK, Ireland and Africa.

'HM Government remains a very important client for EDS and we are pleased that we have been able to settle this dispute without incurring the costs and uncertainties of what would have been a lengthy and complex legal case.'

The settlement does not impact EDS’ prior financial guidance for the fourth quarter of 2005 and full-year 2006, EDS added.