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HMRC internal manual

Enquiry Manual

Contract Settlements: Interest: Certificates of Tax Deposit - Example

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 Certificate of Tax Deposit for £100,000 was purchased on 1 June 2002. It is tendered in respect of a contract settlement which consists of

Tax - due 31 January 2003 £50,000
Tax - due before 1 June 2002 £30,000
Interest - Section 86 £10,000
Penalties £20,000
Expected Offer £110,000

The interest has been computed on the basis that the £50,000 was paid on the due date and the £30,000 was paid on 1 June 2002. The taxpayer wants the balance of the Tax Deposit after payment of the tax element of the settlement to be repaid and set, with interest, against the interest and penalties.

The CTD Team inform you that the tax of £50,000 is covered by £49,259.09 principal and £740.91 interest thereon at the higher rate. After applying £30,000, with no interest, to payment of the remainder of the tax, the balance of the Deposit is £20,740.91, which attracts interest at the lower rate up to 31 January 2005, the settlement, of £675.22.

The settlement will be met as follows

Tax £50,000.00 - £49,259.09 principal + £740.91 interest
Tax £30,000.00 - £30,000.00 principal only
Interest/Penalties £21,416.13 - £20,740.91 principal + £675.22 interest
Paid £101,416.13 - £100,000.00 principal + £1,416.13 interest
Balance To Pay £8,583.87  
Offer £110,000.00  

The letter of offer should include:

“…..offer the sum of £110,000

less £101,416.13 met by the surrender of Certificate of Tax Deposit No … dated 1 June 2002 and the application of the full amount of interest allowable on the certificate.

The balance of £8583.87 to be paid ….”

The interest of £1,416.13 is income of the taxpayer, assessable as Savings and Investment Income. A note should be made to ensure that the interest is returned and assessed.