EM6301 - Contract Settlements: Letters of Offer: Importance of Correctness

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

To be effective an enquiry settlement must result in a legally binding and enforceable contract between

• the taxpayer and
• HMRC.

A new liability under the law of contract replaces the previously existing and separate liabilities to tax/NICs, interest and penalties imposed by the Taxes Acts.

The contract comes into existence when a letter of offer

• signed by or on behalf of the taxpayer
• is accepted by or on behalf of HMRC.

CIR v Nutall (63TC148) gave judicial approval to our long-standing practice of reaching and enforcing contract settlements with taxpayers in respect of tax, interest and penalties. The principle in that case was extended by the Court of Appeal in CIR v Woollen (an Order 14 appeal - see below - not reported) by providing that a properly constituted contract displaces the three elements in it and takes on an identity of its own when it comes to the collection of the composite debt.

You must ensure that the wording of the letters of offer and acceptance allow

• for legal action if payment is not made and
• the use of a shortened procedure (except in Scotland) known as Order 14 proceedings.

This shortened procedure can be used in court proceedings for the recovery of sums due under the contract when HMRC’s Solicitor is able to swear that he knows of no defence to the action.

In these cases, even if the taxpayer attends the hearing, judgement is normally given in favour of HMRC because the validity of the contract cannot be refuted. Collection can then proceed.

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