Electronic Data Systems Corp. will pay the U.K. government $122 million to settle a dispute over a faulty system the tech company supplied to administer tax credits.

Technical problems plagued the system launched by EDS in April 2003. HM Revenue and Customs had threatened to sue the company after dropping it as its main contractor for information technology in 2003. Specific terms of the agreement were not announced.

"We have achieved a settlement of this complex dispute with EDS agreeing to pay compensation. We were determined to reach a fair settlement for the taxpayer, and I believe that has now been achieved," said HMRC chairman David Varney, in a statement.

Through 2004, the computerized Child Tax Credit and Working Tax Credits system awarded billions in tax credits to nearly 6 million families, but as many as one-third of those recipients were overpaid that year, according to a government report published in September. The report said the typical overpayment was between 10 percent and 14 percent, caused by both fraud and error.EDS, based in Texas, provided IT services for HMRC under an outsourcing contract from 1994 through 2004 and still does other work for the U.K. government. The company said the settlement spared it potentially huge legal costs.

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