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HMRC internal manual

Self Assessment Manual

HM Revenue & Customs
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Compliance: enquiry work: contract settlement

Enquiries into a taxpayer’s affairs may reveal under-declarations and omissions of income. In a case where a taxpayer understated income and interest and / or penalties, including surcharge, are being sought the aim will normally be to conclude the enquiry by a contract settlement.

A contract settlement takes the form of a letter of offer from the taxpayer, which is accepted in writing by HMRC. Additional liability, interest, surcharge and penalties for all affected years are swept into the contract settlement.

For the final year of enquiry, the return charge is manipulated to produce the correct payments on account for the following year (unless interest attributable to the increase in the payments on account is included in the contract).

Partnership income is assessable on individual partners of

  • Pre 6 April 1994 partnerships for 1997-98 onwards
  • Other partnerships for 1994-95 onwards

It follows that there will be no partnership contract settlements covering the above liabilities. But, of course, a contract settlement can be made with the individual partner in respect of additional liability arising on his / her share of the income.

Case I or II profits for 1996-97 of a pre 6 April 1994 partnership are assessable on the partnership. Additional liability from enquiries into a Case I or II source is assessed on the 1996-97 CODA partnership assessment or, alternatively included in a partnership contract settlement.

Liability on other partnership income and Capital Gains for 1996-97 from a pre 6 April 1994 partnership is assessable on the partners and may therefore be included in contract settlements made on the partners.

The contract settlement can involve a series of payments by regular instalments.

Contract settlements are handled manually in the Miscellaneous Charges Unit. They will continue to be handled in the Miscellaneous Charges Unit irrespective of whether the settlement includes SA liability or not.