The Ministry of Defence will reluctantly hand control of a project to build two new aircraft carriers for the Royal Navy to BAE Systems in an attempt to avoid a £700 million tax bill.

The £3.8 billion carriers will be built by an alliance of companies including BAE, VT, Babcock and Thales UK, but only one must be named prime contractor. In a twist of tax law, VAT is applied to ships built by multiple companies but not to those built by only one.

The Government had hoped not to give BAE, Europe’s largest defence company, prime status on the project because it fears a return to the days of cost overruns and delays in big defence projects.

The House of Commons Defence Committee is so concerned by BAE’s habit of blowing budgets on big projects that it has asked the MoD to consider whether there is an alternative. A senior political figure told The Times: “We are worried that the MoD cannot control BAE and it is taxpayers who end up paying the price.”

BAE and VT, formerly Vosper Thornycroft, are proposing to merge their shipbuilding assets into a new company to construct the carriers. This joint venture, Shipco, will be the prime contractor and BAE the majority shareholder.

Other alliance members will become subcontractors, although they insist on retaining equal power. BAE and Shipco will not be allowed take any profit from subcontractors’ work.

However, defence sources said that once BAE has prime contractor status, it will start to manoeuvre to control the entire programme. Mike Turner, BAE’s chief executive, is understood to have been lobbying to take control of the carrier project for some time. He has told government ministers that BAE is doing about 60 per cent of the carrier work and should, therefore, be in charge of the entire contract.

MoD officials are understood to be concerned that history may repeat itself, with BAE delivering another big project late and over budget.

In the past decade, BAE has struggled to deliver a number of vital pieces of military equipment on time. The Nimrod air surveillance replacement programme, for instance, is six years behind schedule and the cost has risen from £2.8 billion to £3.5 billion.

BAE’s Astute nuclear submarine programme is £1.2 billion over budget and four years late. The Type 45 destroyers that BAE is building in partnership with VT are £1 billion over budget and two years late.

A spokesman for BAE said: “The problems with Astute and Nimrod were pre-contract renegotiation and are not comparable now. Negotiations are at an advanced stage but no contract is yet in place.”

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