Inland Revenue is set to keep its mainframe-based First computer system for several more years, despite warning in its annual report that its "ageing technology" was putting its ability to collect tax increasingly at risk.

The department warned ministers late last year that it expected it would have to spend between $1 billion and $1.5b, during about 10 years, on modernising its systems.

A spokesman told BusinessDay last week the IRD issued a closed tender to Hewlett-Packard and Unisys, offering them the option of continuing to support First's hardware, software and services for up to a further five years. Its original contracts with the companies were to expire next year but have already been extended to 2014.

First was built at a cost of $201m in 1991. Inland Revenue described the system in last year's briefing paper to Revenue Minister Peter Dunne as "being like a house full of appliances connected to electricity by a cable full of intertwined wires".

"When you change or disconnect one wire it can be difficult to tell what appliances in the house will be affected."

It reiterated in its annual report, published last week, that its "ageing operating model and technology infrastructure" meant the department was unable to satisfy the changing expectations of its customers or to respond rapidly or economically to government policy changes.

However, it also went further, saying it faced "an increasing risk of system issues that constrain our ability to collect and disburse money".

"High-level planning" had identified a number of longer-term options to transform the department but no decisions had been made, the spokesman said.

"Inland Revenue is currently in the process of preparing a strategic business case for the Government to consider.

"This is likely to be followed by a series of more detailed project-specific business cases. Any subsequent tender process undertaken in regard to a future implementation partner is also subject to the business case being approved by Cabinet," he said.

French consultant Capgemini is helping Inland Revenue assess its options.

A source said the department was yet to decide whether it would need to completely replace First with a new mainframe-based system or switch to more modern- technology architecture, using "middleware" such as Oracle's GoldenGate software system, that might let it leave First intact.

Another source estimated in February that any plan to ditch or largely bypass First was likely to be accompanied by a drive to axe about 1000 jobs at the department.

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