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HMRC internal manual

Enquiry Manual

Contract settlements: general

The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.

This section is concerned with the settlement of direct tax enquiries by contract settlement.

VAT and VAT penalties must not under any circumstances be included in a contract settlement.

Where you seek penalties in a direct tax enquiry, you need to decide whether to conclude the enquiry by contract settlement or formally.

  • You should normally aim to conclude the enquiry by means of a contract settlement where you can agree the amounts with the taxpayer and it is administratively more convenient for both the taxpayer and HMRC.
  • You should proceed formally if you cannot agree with the amounts or you consider that this would be less resource intensive
  • In a contract the parties exchange consideration to create the bargain.. When we make a contract settlement, HMRC gives up its right to proceed formally for the tax, interest, penalties etc in exchange for the taxpayer’s money.

It follows that if we could not proceed formally for the tax, interest, penalties etc then we should not include it in a contract except where we acknowledge that the taxpayer is offering to pay something voluntarily.

It may be that you are unsure whether we could proceed formally in which case you should discuss the matter with your manager. But if the doubt is because there have been unreasonable delays in the case and the penalty position is weakened you must not abandon the penalty but submit the papers to Contact Link.

You should be careful not to issue a closure notice or anything that could possibly be mistaken for such a notice because the issue of such a notice would start the penalty time limits running. But see EM1990 if the tribunal has directed that a closure notice be issued.

If the taxpayer or agent insists on the issue of a formal closure notice before making a contract settlement, then this should be done.

You should advise the taxpayer that the issue of a closure notice will have the effect of bringing all the outstanding liabilities into the Statement of Account and the recovery officer may well start enforcement action before the contract settlement has been finalised.

It is essential that if a closure notice is issued, it includes the amendments that you have concluded are necessary as a result of your enquiry.

Once a contract offer has been accepted, it has the same effect as the issue of a closure notice. The year(s) included in the contract become final, and you will not be able to make any further enquiries into those years EM1530, unless you consider that the conditions for making a discovery assessment are satisfied, see EM3200+.

Contract settlements will cover years where

  • there are open S9A, para 24 etc enquiries, and
  • the SA window has closed and discovery assessments can be made, and
  • pre-SA years, where discovery assessments can be made.