Contract Settlements: Letters of Offer: Detail - Interest, Penalties and Surcharge
The guidance about contract settlements at EM6000+ only relates to direct tax. You must never include VAT or VAT penalties in a contract settlement.
If there is no interest to be included in the settlement there should be no reference to interest in the offer. Similarly if there is no penalty or surcharge which could be included, there should be no reference to either.
It will be comparatively rare to have a contract settlement without a penalty. If only tax (and NIC) and interest are to be collected the liabilities will normally be recovered by assessment.
A mention of penalties where a claim could be made (for example, a case in which the level of penalties has been abated or reduced to nil) would not invalidate the offer, but it is preferable to omit the mention.