HM Revenue and Customs is set to take EDS, its former IT supplier, to court over a computer fault that overpaid people tax credits and could cost the taxpayer £600m.

Whitehall sources said it would be the first time that a government department has sued a computer company for its failings.

The result could open the way for future compensation claims against Whitehall IT suppliers that fail to provide reliable systems.

The problem centres on a £2 billion overpayment of tax credits that has left some families facing the prospect of having to repay up to £1,500.

It has created a huge dilemma for ministers, who accept that most families have spent the money and will have extreme difficulty paying it back.

A total of £1.9 billion needs to be recovered. Of that, £1.3 billion of the overpayments were due to changes in family status and rises in income that were not picked up by the system. This amount should be recovered.

However, £600m was overpaid as a result of administrative and computer errors. This money cannot be claimed back by the taxman and it is the subject of detailed talks over compensation.

If a “satisfactory” solution is not reached, the Revenue and Customs is likely to sue EDS.

EDS has also had problems running the Department of Work and Pensions computer system. Despite that it has just won a £4 billion contract to supply the Ministry of Defence with an integrated communications system — the Defence Information Infrastructure programme.

The tax credit system is now run by Cap Gemini Ernst & Young and Fujitsu services.

EDS said last night: “We continue to devote our best resources to the discussions in order to secure a mutually acceptable outcome without recourse to litigation.”