The Inland Revenue has threatened to sue EDS to recoup some of the money it has lost thanks to a faulty tax-credit computer system.

Her Majesty's Revenue & Customs (HMRC) wants to recover part of the estimated £1.9 billion in overpayments that were caused in part by technical glitches in a credit system designed and implemented by EDS.

The system was built to guarantee that accurate credits were awarded to families who have children or were below certain income levels.

HMRC declined to disclose EDS's specific role in building or supporting the system, or the amount it would seek to recover, citing the pending litigation. But with the prime minister forced to apologise for the cock-up, which has affected thousands of low-income families, the issue is unlikely to die down.

At the same time however, legal action would involve the disclosure of large numbers of emails and memos between EDS and the government that could prove embarassing. It would also set a precedent as the first time the government has sued an IT supplier - something that is surprising given the large number of IT disasters in recent years.

Most of the overpayments were the result of procedural errors, the Revenue said, but the remaining overpayments, which it is seeking to recover from EDS, were the result of processing and technical glitches.

EDS implemented the system, but after its support contract expired in June 2004, rival Capgemini was hired by HMRC to take over. "HMRC now has a new IT partner, the system is working well, and discussions are ongoing with EDS about compensation for past failures," the agency said in a statement. "Court proceedings will begin if and when those discussions do not satisfactorily resolve the dispute."

A July 2003 House of Commons Treasury Committee report said the EDS-built credit processing system suffered performance problems as it took feeds from other systems. IT staff found response times to be inordinately slow, which caused the system to be brought down several times a day.

EDS declined to comment on the situation. "These discussions continue, and we're putting our best resources on them with the aim of making sure we get to the point where there is an agreement that's mutually acceptable around the tax credits issue," said a spokesman.