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HMRC internal manual

Enquiry Manual

Contract Settlements: Surcharge: Interaction with Penalties

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

The detailed guidance on the subject of surcharge generally is to be found at EM4100+.

You cannot also impose surcharge on duties which are to be included in your calculation of tax geared penalties, EM4103. So if the penalty chargeable is likely to be less than the surcharge plus any interest that has accrued on it, you do have the option of omitting that duty from the amount on which your penalties are calculated. If you do this, then the surcharge and related interest can be included in your settlement figures.


Culpable duty on which surcharge has already been imposed £5,000

Surcharge imposed on that figure - 5% x £5,000 £250
  5% x £5,000 £250
Interest accrued to date on that surcharge   £30
Total surcharge and interest   £530
Proposed abated penalty 10% x £5,000   £500

In this situation you could exclude the penalty from your calculations and include instead the surcharge and related interest.

You can include either

  • the penalty, or
  • the surcharge plus interest,

but not both. The same principle applies to any tax geared penalties which you are seeking to impose by determination. In this situation, the surcharge will need to be formally discharged and any payments already made against it credited to the taxpayer’s next statement of account. These would then be available for set-off against the earliest arrears.

For guidance on the interaction of surcharge and

  • penalties under FA07/SCH24 see CH84950+
  • penalties under FA08/SCH41 see CH76000+.