HMRC Contract Settlements and Letters of Offer

Almost no investigation ends at the tribunal. It ends with an offer and a letter of acceptance: a contract, not an assessment, with no right of appeal. Which means the drafting of that offer decides what the client has actually bought.

How Investigations Actually End

Very few tax investigations end in a tribunal decision. The overwhelming majority end in a contract settlement: a binding agreement between the taxpayer and HMRC under which the taxpayer offers a sum in final settlement of the tax, interest and penalties, and HMRC accepts.

It is a contract, not an assessment. That single fact governs everything that follows: how it is formed, what it covers, how it is enforced, and how hard it is to escape.

Settlement Versus Assessment

The trade is certainty and control for the loss of appeal rights. That is usually a good trade, but only if the offer is drafted so that the certainty is real.

Drafting the Offer

This is where cases are won and lost, and it is done badly with striking regularity.

Scope

• Specify the years and the taxes. An offer expressed to settle “my tax affairs” invites argument later about what was covered.
• Say what is included. Tax, interest and penalties should each be identified, with the composition of the figure set out. A single undifferentiated number is a source of dispute about what was actually settled.
• Deal expressly with other entities. Where a company and its directors are both under investigation, make clear whose liabilities the offer covers. A settlement of the company’s position does not release a director from a personal liability notice unless it says so.
• Address the Cenlon protection. A point specifically dealt with and agreed in settling an appeal cannot later be reopened by a discovery assessment: see Cenlon Finance v Ellwood. A settlement letter that lists the issues resolved creates that protection. One that records only a total figure protects very little.

Payment

• Build instalments into the offer where the client cannot pay immediately, rather than settling and then negotiating Time to Pay separately.
• Deal with forward interest on instalments explicitly.
• Consider what happens on default. HMRC will normally want the balance to fall due immediately.

What to resist

• Voluntary restitution for out-of-time years. HMRC frequently invites a taxpayer to include years it could not assess, on the footing that the taxpayer is making good the loss voluntarily. There may be reasons to agree, it can improve the penalty position and buy finality, but it should be a considered decision, not an assumption. Check the time limits for every year first.
• Open-ended wording that leaves the scope uncertain.
• Signing before the figures are agreed in detail.

Where COP9 Is Involved

An investigation under Code of Practice 9 and the Contractual Disclosure Facility has its own architecture, and the settlement sits at the end of it.

• The outline disclosure is made within the statutory window after the CDF offer, and admits deliberate conduct bringing about a loss of tax.
• A disclosure report follows, usually prepared by an adviser, quantifying the loss across the relevant years.
• A certificate of full disclosure is signed by the taxpayer confirming that the disclosure is complete.
• A statement of assets and liabilities is provided, and in some cases a certificate of bank accounts and credit cards operated.

Ability to Pay

Where the client cannot pay the calculated liability, the means position becomes central. HMRC will ask for a statement of assets and liabilities and, in many cases, detailed income and expenditure information.

• Be accurate and complete. An understated means statement is treated very seriously and undermines everything else, particularly in a COP9 case.
• Present the position properly. Illiquid assets, secured borrowing, genuine commitments and the position of a spouse or business all matter.
• Consider the alternatives honestly: an instalment settlement, a Time to Pay arrangement, or where the position is genuinely hopeless, an IVA or bankruptcy. A settlement the client cannot perform helps nobody.
• Remember the enforcement consequences of default: the debt becomes a contract debt and HMRC can sue on it, with the usual insolvency consequences following.

Can a Settlement Be Undone?

Rarely, and this should be explained before the offer is made rather than afterwards.

• There is no appeal. A contract settlement is not an appealable decision.
• Ordinary contractual grounds (misrepresentation, duress, mistake) are available in principle, but the threshold is high and the circumstances rare.
• Public law challenge may be available where HMRC acted unfairly or in breach of a legitimate expectation, subject to the exacting standard in Gaines-Cooper and the three-month promptness requirement.
• Where HMRC seeks to reopen, the Cenlon principle and s54 TMA 1970 are the defences, which is why the drafting matters so much.

Practitioner Checklist

1. Check the time limits for every year before agreeing to include it. Four, six or twenty depends on behaviour, and behaviour is contestable.
2. Fight the behaviour category before the arithmetic. It drives the penalty range, the time limits, publication and any personal liability notice.
3. Get the penalty reductions right: telling, helping and giving access, and whether the disclosure was prompted or unprompted.
4. Consider special reduction and ask HMRC in writing whether it has been considered.
5. List the issues resolved in the offer, not just a figure.
6. Deal with connected persons and entities expressly.
7. Build the payment terms into the offer.
8. Do not sign a certificate of full disclosure until the work is complete.
9. Keep the file. The settlement correspondence is the evidence of what was agreed if HMRC returns.

Frequently Asked Questions