EM6002 - Contract Settlements: Settlement Discussions

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

As you approach the settlement stage, you will need to tell the taxpayer about

• the tax effect of the amendments you are proposing to their assessment for the enquiry year and
• the tax you believe is due for any other years that you are considering, see (This text has been withheld because of exemptions in the Freedom of Information Act 2000).

When explaining your figures to the taxpayer or agent you must make clear that they are ‘without prejudice’. Where necessary the letter should make clear that it is not a closure notice, see EM3836. You must be particularly vigilant to ensure that nothing you say can be interpreted as completing the enquiry. Take extra care where you are corresponding directly with the taxpayer.

Within the context of discussions about settlement proposals, including contract settlements, 'without prejudice' means that any proposals that you discuss with the intention of reaching an agreement

• are not binding on either the taxpayer or HMRC, or
• do not constitute a full or partial agreement about any of the final settlement figures, and
• cannot be referred to in any subsequent appeals.

A final position can only be reached when either

• HMRC and the taxpayer enter into a binding contract settlement, or 
• the taxpayer accepts HMRC's decision notices by not appealing against them, or
• any appeals are determined by a tribunal or the courts and further appeal rights are exhausted.

If the taxpayer or agent does argue that any letters explaining your figures or subsequent settlement proposals have effectively completed the enquiry, you should immediately issue a disclaimer and seek advice from (This text has been withheld because of exemptions in the Freedom of Information Act 2000).

You should normally try to reach agreement about the tax position before considering any penalties.

When there has been a loss of tax/interest and penalties/surcharges have been incurred, you should explain to the taxpayer that it is our normal practice to establish an appropriate level of penalties and accept pecuniary settlements.

If an agreed settlement cannot be reached, you may need to take formal action to determine the appropriate

• tax and NIC
• interest
• surcharge
• penalties.

You should use form 94, see EM6203, to control the settlement figures.

(This text has been withheld because of exemptions in the Freedom of Information Act 2000)