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HMRC internal manual

Compliance Handbook

From
HM Revenue & Customs
Updated
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Litigation and settlement strategy: resolving a dispute: example

This example illustrates how we settle disputes without agreeing package deals.

There are two ongoing disputes about

  • an expense of £90,000, which the person considers is wholly deductible as marketing but HMRC considers is non-deductible as client entertaining, and
  • an expense of £100,000, which the person considers is deductible as revenue expenditure but HMRC considers is capital expenditure. If this expense is held to be capital in nature, it must then be decided whether or not it qualifies for capital allowances (allowances would be £18,000 in the relevant year as a deduction from taxable profits).

Assuming both parties have satisfied themselves that both disputes are genuinely ‘all or nothing’, see CH40850, HMRC and the person could agree to settle in one of six ways:

Increase in taxable profits Reason
   
£0 No adjustments required as HMRC accepts the person’s analysis in relation to both items
£82,000 HMRC accepts the person’s analysis in relation to the marketing expenditure but an adjustment is made for the capital expenditure, which HMRC then agrees qualifies for capital allowances
£90,000 HMRC accepts the person’s analysis in relation to the capital/ revenue expenditure but an adjustment is made for the marketing/client entertaining expenditure
£100,000 HMRC accepts the person’s analysis in relation to the marketing expenditure but an adjustment is made for the capital expenditure and it does not qualify for capital allowances
£172,000 Adjustments are agreed in relation to both items and HMRC accepts that the capital expenditure qualifies for capital allowances
£190,000 Adjustments are agreed in relation to both items and the capital expenditure does not qualify for capital allowances

On the assumption that both issues were genuinely ‘all or nothing’ in nature, it would not be open to HMRC to agree to a settlement with the person on any other basis. For example, we could not accept an increase in taxable profits of £86,000 as a 50/50 split across the two issues.

If, however, following further analysis it appeared that

  • one, or even both, of the items was not in fact an ‘all or nothing’ issue and
  • the potentially deductible expense could be broken down into a number of sub-categories, some of which HMRC might be able to agree was, or was likely to be, allowable,

then additional outcomes for resolving the dispute, as well as the six in the table above, would become available and could potentially be agreed. In such a case, final figures should be agreed for each of the discrete issues, and should be clearly recorded and understood between HMRC and the person.