EM6001A - Contract settlements: Deeds
The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.
A deed is a legal document that is an official record of a binding agreement. The drafting of a deed constitutes a reserved legal activity under the Legal Services Act 2007. Within HMRC, such work must therefore be undertaken by a suitably qualified lawyer who is regulated by an approved regulator.
When should I consider the use of a deed?
There are only a limited number of circumstances when you should consider using a deed. These are:
- when there is uncertainty about whether the consideration, see EM6336, is adequate to form a binding contract
- where one or more parties to a multi-party contract are not able to offer adequate consideration
- when having more than 6 years (up to a maximum of 12 years for a deed) in which to enforce any breach of simple contract will be a relevant factor
- when the taxpayer insists on the use of a deed
- complex cases, such as those which involve multiple group entities, group relief and carried forward balances
Where a taxpayer proposes settlement by way of a deed solely because they wish to amend or add to the clauses contained in a standard letters of offer, you should seek advice from TALA at an early stage. TALA can advise on the wording of a bespoke letter of offer, which in many cases will provide an acceptable alternative to settlement by Deed.
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In some cases, typically involving large businesses, a taxpayer may insist on settling matters by way of a deed, based on specific legal advice they have received. Where this occurs, you should seek advice from TALA.
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Contacting HMRC Legal
When considering the use of a deed, it is important to assess whether this approach is both necessary and cost effective. There should be a clear and tangible advantage to proceeding by way of deed, as opposed to using formal powers, a contract settlement or settling an appeal by agreement - for example, under s.54 TMA.
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Legal requirements for a deed
A deed is a form of legally binding agreement that has been signed by all the parties to that agreement and witnessed.
A deed must make it clear that it is intended to be a deed. This will mean that it will contain specific wording confirming that the document is intended to be a deed and signed as such.
Settlements made through a deed are legally binding like a simple contract. The advantage of using a deed is that they can be used in some limited circumstances where it is not possible to settle though a simple contract. There are additional formalities for entering into a deed over a simple contract, such as the need for a deed to be witnessed.
Importantly however, the drafting, amendment or preparation of a deed falls within the definition of a ‘reserved legal activity’ under the Legal Services Act 2007. This means that where a taxpayer wishes to employ an agent to draft, prepare or amend a deed, this work must be carried out by a qualified lawyer, who is regulated by an approved regulator. An accountant or financial advisor will not normally be able to do this work. It is however the responsibility of the agent acting on behalf of the taxpayer to satisfy themselves that they are able to comply with the Legal Services Act 2007.
Please note that 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 a simple contract, contact the Office of the Advocate General for advice.
Where a settlement has been reached using a deed any variation of that deed must be done by deed. Under these circumstances you should contact HMRC Legal Group for advice.