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HM Revenue and Customs has carried out a major IT infrastructure modernisation project on time and to budget, its annual report says.

The report paints a positive picture of developments at a department that has a history of IT problems, most notably the scandal surrounding the introduction of tax credits.

Last month, the powerful Commons public accounts committee renewed criticism of the tax credits system, revealing that overpayments for the first three years of the scheme had hit £5.8bn. The MPs said chancellor Gordon Brown's flagship scheme was still plagued by overpayments and a lack of basic information about payments, fraud and error levels.

But the annual report describes how its wider infrastructure has been successfully refreshed in one of the largest software upgrades of its kind in Europe.

"Under the project we have upgraded 1,100 file servers and 110,000 workstations (including 500 remote users and 100 home workers), upgraded 120,000 mailboxes, and integrated 750 in-house software applications," it says. The new system means staff can now communicate freely across a shared platform.

Design and implementation costs over 2005-06 and 2006-07 are "expected to be about £161 million against a budget of £175 million", the report says.

HMRC has also introduced a new SAP enterprise resource planning system covering its back-office finance, HR and procurement services. This offers a single standardised approach to the corporate functions for across HMRC, bringing together systems for the former Customs and Excise and Inland Revenue departments.

"The system was delivered to budget and to a timeframe of 11 months that matches best private sector standards," the report says.

It adds: "The system delivers significant transactional savings and contributes to meeting the 2004 spending review commitments in the areas of finance, HR and procurement. It is expected to facilitate reductions in expenditure on goods and services by around 6% per year."

But the report concedes that the fall-out from the tax credits IT system problems is continuing. It confirms that moves to automate the process of limiting the recovery of overpaid tax credits - a measure agreed because of the hardship caused by attempts to claw back the overpaid money - have failed.

"Making this process automatic would have involved significant changes to the IT system and, after extensive testing, we concluded that it was not possible to make a risk free introduction to the original timetable," it says.

Instead, HMRC introduced "a process involving IT-supported clerical action". The report says: "In the vast majority of cases, in-year restriction takes effect by the next pay date or at worst by the following pay date. This mirrors what will be achieved by an automated restriction.

"The overriding aim continues to be to implement changes safely without adding undue risk to the system’s performance in paying claimants. We are working hard to replace the current process with a fully automated solution. Based on the balance of risks and the need to implement this safely, we are planning to do this by June 2007."

Earlier this year, paymaster general Dawn Primarolo was forced to admit that the equivalent of 55 full-time staff a year were employed purely to carry out manual adjustments to limit the amount of money that claimants who have been overpaid by the tax credit system have to pay back.

HMRC hit its target for 35% of self assessment tax retiurns tio be filed online by 2007-08. Nearly three million returns were filed online by 31 January - 35.1% of the total and 900,000 more than last year.

But the department acknowledged that it would not now meet its original target for VAT returns - for 50% to be filed online this year, with the figure still under 10%.

Last year saw 1.18 million employers successfully file their 2005-06 Employer’s Annual Returns online, an increase of around 20% over 2004-05. The HMRC report says: "Significant investment in new IT systems in recent years meant that we were able to receive and validate over 10,000 returns an hour successfully at the peak period."