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HMRC internal manual

Enquiry Manual

Contract settlements: expected offer: means - review

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

Income and Expenditure

When reviewing means you should focus on the specific purpose of the review at this stage in the enquiry, which is to identify the amount of money that is available to a taxpayer for living expenses and to meet the expected offer.

When we use a means review to identify the destination of additional profits, there may be a tendency for the taxpayer to overestimate private income and underestimate private expenditure.

When we are considering ability to pay there may be a tendency for the taxpayer to

  • exaggerate means in order to influence our acceptance of an offer that the taxpayer cannot pay, or
  • suppress means in order to influence our acceptance of a substandard offer.

To ensure that the taxpayer pays as much as they can afford as quickly as possible you should also examine the statement of income and expenditure critically, following the general principles in EM3572. You should compare these with the trigger figures for expenditure in DMBM802120. If the details provided by the taxpayer differ substantially and you have any doubts about them, you should request supporting documentation.

You must always consider income and expenditure together with

  • what income can be raised by liquidating assets within a realistic time period
  • what additional liabilities are due to be paid in the relevant period.

If you need further assistance when considering means within the context of ability to pay a contract settlement debt, you should contact the DMB Contract Settlements Unit (CSU), however, do not contact CSU about anything other than contract debt.

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Assets and Liabilities

You should examine the statement of assets and liabilities critically to see whether it can be reconciled with information from your review of the taxpayer’s means, see EM6216.

When the taxpayer has assets that they can convert into cash, it is reasonable to expect them to use these to settle their liabilities to HMRC.

You should bear in mind that a taxpayer who has concealed income is just as likely to conceal assets. These may be

  • assets transferred to other persons, which might be recoverable, if necessary by bankruptcy proceedings, and
  • assets acquired, or commitments to acquire specific assets entered into during the enquiry when the taxpayer could reasonably be assumed to know that they had additional liabilities to meet.

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Assets bought out of concealed profits

You should take a firm line in relation to assets, including a residence, if the taxpayer is likely to have acquired them out of concealed profits. Be especially firm if the acquisition was made at a time when it had become clear that there would be substantial HMRC debts to meet.

When calculating the available proceeds of the sale of any asset, remember to take into account any capital gains tax liability that might arise on the disposal, although this would not apply to a residence that qualifies for residential exemption.

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Assets disposed of at undervalue

There is a possibility that a taxpayer will dispose of their assets other than at their full market value in an attempt to avoid paying tax. If you are aware of any such transactions, known as of voiding transactions, and the taxpayer is unwilling or unable to attempt to recover the assets them self, you should consult Enforcement and Insolvency Service for advice.