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HMRC internal manual

Enquiry Manual

Contract Settlements: Penalties: Abatement: Taxpayer to be Informed

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

This guidance does not apply to penalties for inaccuracies in returns or other documents with a filing date on or after 1 April 2009 where the return or document relates to a tax period beginning on or after 1 April 2008. Refer to the Compliance Handbook at CH82000+ for help with these penalties.

Make the taxpayer fully aware of HMRC’s views concerning all factors which affect the settlement either

* at interview, or
* by a letter issued directly to him.

You should cover

  • the penalty sought
  • the statutory provision that imposes the penalty
  • the facts which HMRC allege give rise to the penalty, and
  • whether the penalty is based on fraudulent OR negligent conduct, noting EM6383 that it will be exceptional to allege fraud.

Make a clear note that culpability was explained and established before the taxpayer was invited to make an offer in settlement. Considerable difficulty may arise if a taxpayer should try to resile from an offer made and accepted and it is found that this practice has not been properly observed. It could also lead to an allegation of unfair treatment under the Human Rights Act 1998 EM1350+.

It is equally essential that in any discussion of penalties the question of abatement should be clearly brought out. You must

  • draw the taxpayer’s attention to the maximum amount of the penalties which you consider he has incurred, and which are in date for formal action
  • draw the taxpayer’s attention to HMRC’s policy to abate the maximum penalties and accept an offer as explained in leaflet IR160
  • explain the powers to determine a penalty should an agreed settlement not be reached
  • point out that the taxpayer has the right to

    • appeal against the decision, and
    • request a review of the decision.

Whether or not the taxpayer requests a review, they may notify their appeal to the tribunal (but not while a review is ongoing) if they do not accept your decision on the penalty position.

For more detailed advice see Appeals, Reviews and Tribunals Guidance at ARTG2100+.

For more detailed advice on the conduct of the settlement interview see EM6380+.