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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.

When should I consider settling an enquiry by contract settlement? 

You should consider settlement through a contract settlement when you and the taxpayer are in agreement over the amounts of tax, interest, penalties or any other liabilities that are to be included in the contract.

You should use a contract settlement when it is the most administratively convenient method of settlement. If it is easier to settle the case formally, through revenue amendment and assessments, or there is no prospect of reaching an agreement over the figures, then you should always proceed formally.

Where you cannot take formal action, for example because we are outside of the assessing time limits, you cannot include amounts that cannot be assessed formally in a contract settlement unless the taxpayer agrees that these should be included on the basis of voluntary restitution.

If you are unsure whether or when to settle formally or by contract settlement you should discuss the case with your manager. 

There may be specific reasons why you may be uncertain how to proceed, for example because a tribunal has directed that a closure notice be issued, see EM1990, or you are approaching the time limits for issuing discovery assessments for an earlier year that are not under enquiry. If you are unsure how to proceed after speaking to your manager, you can obtain advice from TALA(This content has been withheld because of exemptions in the Freedom of Information Act 2000) .  

When considering whether to proceed formally, you should bear in mind that

  • issuing a closure notice will start the penalty time limits running,
  • where formal notices are under appeal, it is still possible to settle through a contract settlement once any disputes are resolved.

What is the effect of settling an enquiry by contract settlement?

When we make a contract settlement, HMRC gives up its right to proceed formally for the tax, interest, penalties, in exchange for the taxpayer’s money.

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, see EM1530, unless you consider that the conditions for making a discovery assessment are satisfied, see EM3200+.

Provided we still have the legal power to make formal assessments or take other proceedings, contract settlements will cover years where

  • there are open enquiries
  • the enquiry window has closed
  • there are pre-SA liabilities
  • a settlement has been agreed without opening an enquiry.

What form must a contract settlement take?

HMRC only ever enter into written contract settlements with taxpayers. You must not under any circumstances enter in to a verbal contract to settle a taxpayer’s liability.

Written contract settlements are legally formed by either

  • exchanging a signed letter of offer and a letter of acceptance to form what is often referred to as a ‘simple contract’, or
  • exchanging Deeds that have been signed by the parties and witnessed by independent persons for each party.

Most settlements do not involve the use of Deeds. Deeds may be used when we have doubts about whether the consideration, see EM6336, in a letter of offer would be adequate to form a binding contract, or when a taxpayer insists on reaching a settlement using a Deed. If you have any reason to believe that it may be necessary to use a Deed, you must follow the guidance at EM6001a before you enter into any discussions about the wording of any Deed.

For the avoidance of doubt, where possible, HMRC will use a simple contract rather than a Deed, but reserves the right to use a Deed when this is more appropriate. 

The law relating to the use of Deeds in Scotland is different to other parts of the UK and this guidance on Deeds has no applicability to settlements reached in Scotland. For practical purposes this means settlements with taxpayers that are either resident or are based in Scotland. If you need advice on a settlement in Scotland, that is not through a standard contract, contact the Office of the Advocate General for advice.