HMRC internal manual

Compliance Operational Guidance

COG932310 - Alternative rights of recovery (PAYE directions): contract settlements: overview

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

The guidance in this section on the use of contract settlements in direction and decision cases should be read in conjunction with the principal guidance on contract settlements in the

  • Enquiry Manual (EM6000 onwards)
  • Compliance Handbook (CH411000 onwards).

Contract settlements are mutually convenient arrangements which replace what you would otherwise do formally. The use of contract settlements in relation to direction and decision enquiries is an alternative to the formal process of transferring tax/Primary National Insurance liability from an employer to an employee through an amendment to the SA record/raising a NIC charge following a direction and decision.  

A contract settlement made with a taxpayer

  • is legally binding and payment can be enforced via recovery proceedings if the taxpayer defaults on the terms of the settlement
  • must be agreed by both parties in writing to be legally binding and cannot be imposed on the taxpayer  
  • does not require a certificate of full disclosure, as the enquiry is not into the taxpayer’s personal return
  • can only cover PAYE income tax, NIC and interest and should not take into account any existing or subsequent SA liability. The taxpayer must still submit SA returns that have been issued for the years concerned. A note must be put on the SA record
  • needs to take into account the authorisation levels at EM6402b.

A contract settlement should only be considered in the appropriate circumstances and further guidance is at COG932320. Do not give the taxpayer, or agent, the impression that this will result in the taxpayer paying more or less than the formal process.

When you make a contract settlement you are giving up HMRC’s right to proceed formally for the tax, NIC and interest in exchange for the taxpayer’s offer of an appropriate sum of money. If you accept a lower figure than the amount due formally, that amount must be agreed by an authorised officer.

You must complete a Contract Settlement Form

  • to show the components of the expected offer
  • for an authorised officer to record approval of the expected offer and
  • to record acceptance of the actual offer when received.