Computer services group EDS has agreed to pay the government £71.25m in compensation for the poor performance of its tax credits IT system.
The Treasury has spent £24m fixing tax credit computer problems
Early problems with tax credits meant thousands of families were overpaid and face clawbacks totalling £2bn.
HM Revenue & Customs had threatened to take EDS to court if it did not pay compensation.
"We were determined to reach a fair settlement for the taxpayer," said HM Revenue & Customs chief David Varney.
EDS had argued that it had repeatedly asked for more time to test the computer system it developed for the launch of tax credits in April 2003.
The group ran the government's tax and national insurance computer systems from 1994 until 2003 when a rival IT firm Cap Gemini was awarded a new £3bn, 10-year deal.
EDS also has contracts with the Ministry of Defence, the Department of Work and Pensions and HM Prison Service.
"The government remains a very important client for EDS and we are pleased that we have been able to settle this dispute without incurring the costs and uncertainties of what would have been a lengthy and complex legal case," said Doug Hoover, EDS's managing director for the UK, Ireland and Africa.