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HMRC internal manual

Enquiry Manual

Contract settlements: settlement discussions

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

As you approach the settlement stage, you will need to tell the taxpayer or their agent about

  • the tax effect of the amendments to their assessment that you are proposing for the enquiry year
  • the tax you believe is due for any other years that you are considering, see EM2002, and
  • any interest and penalties arising from these amendments.

When explaining your figures to the taxpayer or agent , whether in writing or in person, you must make it clear that they are without prejudice and do not constitute an offer of settlement or the closure of your enquiry, see EM3836. You should take extra care where you are corresponding directly with the taxpayer.

  • ‘Without prejudice’ means that anything you discuss with the intention of reaching an agreement cannot be referred to in any subsequent appeals.

Where there is any doubt about the basis of your discussions you should explain that a final position can only be reached when either

  • HMRC enters into a binding contract settlement with that taxpayer by accepting their letter of offer, or
  • the taxpayer accepts HMRC’s decision notices by not appealing against them, or
  • any appeals are determined by a tribunal or the courts and further appeal rights are exhausted, or
  • agreement is reached under S54 Taxes Management Act 1970.

If the taxpayer or agent claims that any letter in which you explain your figures or any subsequent settlement proposals that you make have effectively completed the enquiry or constitute an offer to settle, you must immediately issue a disclaimer and seek advice from contact link.

You should normally try to reach agreement about the tax position before considering any penalties.

When there has been a loss of tax/interest and penalties/surcharges have been incurred, you should explain to the taxpayer that it is our normal practice to establish the level of any penalties and include these in the amount of settlement.

Where any disputes arise, or you reach an impasse, you should consider whether Alternative dispute Resolution (ADR) may help you and the taxpayer resolve these. See the ADR web pages for guidance about ADR.

If an agreed settlement cannot be reached, you may need to take formal action to determine the appropriate

  • tax and NIC
  • interest
  • surcharge
  • penalties.

You should use form 94 or the CSF, see EM6203, to control the settlement figures. For guidance about how the CSF can be used and saved electronically, see CH411130+.

(This content has been withheld because of exemptions in the Freedom of Information Act 2000)