HMRC's tax credits settlement with EDS 'affects fair play' in the sector, MPs said today as HMRC chairman Sir David Varney sought to defend his department's deal with the IT contractor.

Amidst some intense questioning at the Commons Treasury sub-committee today, Jim Cousins, the Labour MP for Newcastle-upon-Tyne, asked Sir David: 'how can you have fair play within the public sector [after the deal]'?

The deal was structured so that part of the £71m payment, agreed as compensation for the failures of the tax credits IT system, would be paid out of future deals signed with government.

Critics have said it means IT procurement is now not a level playing field, with suggestions that government departments might favour EDS in order for HMRC to recover its money,

Responding, Sir David said: 'It does not affect fair play. HMRC retains the right to pursue its claims. This is a very good settlement for HMRC.'

He added: 'EDS would not move [on the deal] unless some part of the payment was deferred. I took the view - and I still take the view - that the public purse was better protected by a larger settlement rather than a lower one.

'Nothing we have done is meant to influence any decision about anybody in government to procure services from EDS,' he said.

HMRC takes the view that there are sufficient procedures in place to prevent any favouritism. Varney said his legal advice had been that the deal did not breach EU guidelines on the issue.

Sir David also disclosed that any court case would have cost £20m and taken two years.

He also hit back at those who leaked details of the settlement, saying that he had given evidence in private to the public accounts committee, adding: 'Our legal advisers write to them to raise legal concerns. Publication could jeopardise a potential legal action against EDS in the future.'

Some £47m has been paid as cash or cash equivalent so far, he said. Dislcosure had left him in an 'extraordinary' position, he said.

Read Tax Hack on the issue at taxhack.accountancyage.com