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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Contract Settlements: Interest: Payments on Account for Post Enquiry SA Year

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 calculating the Section 86 interest for the enquiry years you should also consider the effect that an increase in the tax payable will have on the payments on account for the year immediately following the last year that is included in your enquiry.

  • If you are finalising the enquiry before the balancing payment date for the post enquiry year follow the procedure in SAM ‘Concluding an enquiry’ to amend the payments on account on the SA system.
  • If you are finalising the enquiry after this date you should normally include interest on the increased payments on account in the contract settlement, as in the example below.

In every appropriate contract settlement, that is where the return for the post enquiry year has been received, you should suggest to the taxpayer or their agent that this additional interest should be included within the settlement, so that everything relating to the enquiry is included in the offer. Note however that if the SA return for the post enquiry year shows a liability less than the sum of the original payments on account, there will be no additional interest to include.

Where the interest is included, you will need to add an additional clause within the letter of offer along the following lines.

‘This offer includes the additional interest on the increase to the amounts of the payments on account for the year …./….’ (post enquiry year) ‘

If the taxpayer objects or the method is not suitable because for example the post enquiry year return has not been received, you can amend the payments on account on the SA system. Follow the procedure in SAM ‘Concluding an Enquiry’.

Example

The last year of the enquiry is 2008-09. The original Income Tax liability of £5,000 is increased, as a result of your enquiry, to £7,000. The position for the next year is

2009-2010 Agreed Income Tax payable £9,000

Without the enquiry that tax would be payable

31 January 2010 £2,500
   
31 July 2010 £2,500
31 January 2011 £4,000

As a result of the enquiry, the amounts due and payable will then be

31 January 2010 £3,500
   
31 July 2010 £3,500
31 January 2011 £2,000

You should therefore include in your settlement

  • interest on additional POA1 (3500-2500) £1,000 from 31 January 2010 to 31 January 2011
  • interest on additional POA2 (3500-2500) £1,000 from 31 July 2010 to 31 January 2011.

Note: the interest in this example only runs to 31 January 2011, not to the settlement date for the enquiry. This is because the object is not to collect interest on tax which is unpaid for the year. Your computation is simply intended to charge interest on that part of the tax which was paid on or about 31 January 2011 and which should have been paid on the earlier payment on account dates.