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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Contract settlements: expected offer: instalments - forward interest

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

You must increase the expected offer, as calculated on a cash basis, to compensate for the extra risk and cost involved in an instalment offer. The increase is payable under the terms of the contract and is the consideration for the extra time we are allowing for payment.

We normally refer to this increase as forward interest, but you must not confuse this with any statutory interest under TMA70/S86 included in the offer.

The precise method of calculating the forward interest is to add 1% to the current S86 interest rate and apply this enhanced rate to the progressively reducing balance after each instalment. It is not normally necessary to do this precise calculation because the basic method of applying the enhanced rate for half the period is sufficient where there are equally-spaced equal instalments.

For the basic calculation of forward interest, take the total unpaid balance, and apply

  • a percentage equal to the current rate of Section 86 interest plus 1%
  • for half the total period of payment.

Use the SEES calculator to produce straightforward calculations. This is in SEES>Full Tax Calculators + Settlements>Instalment Offers. When you use the SEES calculator you must print a copy of the calculation and retain this with the letter of offer in the enquiry papers.

You will need to use the precise method for offers involving increasing payments or seasonal variations EM6249. For this, you should calculate the additional forward interest more precisely by

  • using the same percentage as for the basic calculation
  • but applying it to the reducing balances.

Whichever method is used, the calculation does not have to be made with mathematical precision. It is however essential that you retain a clearly marked copy of the calculation with the letter of offer in the case papers. (This content has been withheld because of exemptions in the Freedom of Information Act 2000)