All tax disputes will draw to an end at some point and the mechanism for closing a case will vary depending on the individual circumstances. Generally, HMRC and the taxpayer will be hoping to reach an agreement which will bring the taxpayer’s affairs up to date. It is important for individuals to appoint experienced tax advisers to ensure that the end result is fair.
Some of the ways in which HMRC will conclude a tax case have been explained below.
Formal Settlement
A commonly seen method of closing an enquiry case is where HMRC will issue a closure notice or an assessment of tax due. This might look like a letter to the taxpayer with details of the amendments HMRC have made to the tax position and confirmation of the taxpayer’s liabilities due. It could also be confirmation that HMRC have concluded their investigations and confirm there is no further tax due.
This is called a formal settlement as it is a formal notification of what HMRC believe the taxpayer is due to pay and when they need to pay it by. Once issued, penalties and interest will start collecting on the outstanding debt immediately. The taxpayer or their agent may not always agree with HMRC’s decision and there exists an appeals process to challenge the conclusions reached by HMRC.
HMRC will generally use this method when they are in dispute with the taxpayer over tax due; if Alternative Dispute Resolution (ADR) has not been successful; or if they believe it is unlikely that the taxpayer will pay the amounts requested.
Once a formal settlement has been issued a taxpayer has 30 days to appeal any tax assessments, otherwise the case will be closed and handed to Debt Management and Banking (DMB) with no little room for negotiation. If payment terms are required, the taxpayer will need to contact the debt management team and explain their case, as debt management personnel are not the same as the case officers who will previously have been assigned to the taxpayer’s enquiry.
This form of settlement is therefore not always the best route for the taxpayer and there can be little flexibility for tax advisers to assist unless there are grounds for appeal. However, in some cases it will be simple and easy to close this way, for example if the taxpayer agrees to the tax assessments and does not require any time to pay the liabilities
Informal Settlement
An informal settlement, or a “contract settlement”, despite its name, is still a formal arrangement between HMRC and the taxpayer of the liabilities due and represents a legally binding contract. These settlements will usually take the form of a signed “letter of offer” which is followed by HMRC’s acceptance.
The contract means that HMRC are giving up their right to proceed formally (as above) in the collection of the taxpayer’s debt in exchange for the agreed upon amount. Contract settlements are usually used when HMRC and the taxpayer are in agreement over the amounts of tax, interest and penalties that are due at the end of an enquiry or disclosure. In fact, HMRC’s guidance (EM6001) to its case workers is that they should use the contract settlement route when it is the most administratively convenient method.
Usually, a contract settlement is reached after a longer case has come to an end – for example a disclosure case (such as a voluntary disclosure and COP9 disclosures) or a case with multiple years of enquiries.
It is helpful for both the taxpayer and the adviser as it gives the opportunity for all parties to communicate an appropriate course of action. Importantly, contract settlements can include payment terms, which is important if the taxpayer requires a payment plan to settle the outstanding liabilities due.
For this reason, a contract settlement can be the preferred route as it is far often easier to negotiate payment terms with the case officer that a taxpayer and their adviser have already been working with on an enquiry or disclosure.
It should be noted that contract settlements are not available for indirect taxes such as VAT liabilities.
Settling by Deed
Although a much less commonly seen settlement route, occasionally HMRC will use a deed where they feel they cannot use a contract settlement.
A contract gives the taxpayer protection that HMRC will not take any formal proceedings in respect of the taxes outlined in the contract. However, this may be challenging for HMRC in the cases of a partnership for example, where an enquiry into the partnership as a whole is ongoing, but HMRC wish to close the case for one individual partner. A deed allows HMRC to close the case for the individual partner whilst leaving the partnership enquiry open, and still gives the individual taxpayer legal protection from HMRC re-opening their individual case again in future.
The statutory requirements of a deed are that it must be made in writing; it must specify that it is a deed on its face or that it is signed as a deed; and it must be signed and witnessed by the relevant parties. HMRC should notify a taxpayer and their adviser that they are using a deed, however HMRC are not obliged to alert a taxpayer or their adviser that preparation of a deed is a ‘reserved legal activity’. In short, a tax adviser, who is unlikely to be legally qualified, will be restricted in terms of the advice they can offer a taxpayer on the deed itself, and the engagement of a qualified legal professional may also be required.
Generally a taxpayer’s adviser can provide advice as to the implications of entering into a settlement by way of a deed, and can advise on the accuracy and the content, as well as the tax implications. Preparation of the deed including drafting, amending, insertion, execution and signing cannot be done by anyone who is not specifically authorised to do so. For this reason it may be more costly to a taxpayer if the engagement of a solicitor is required, however in particular cases – for example enquiries into partnerships, or groups of companies – it may be the most efficient route to closure for an individual.
As in any tax dispute or disclosure case, it is vital that taxpayers appoint an appropriately experienced tax adviser that has the necessary expertise to settle on the best possible terms and in the most efficient manner.
If you need advice on an HMRC assessment, amendment, contract or deed, contact our experts now for a confidential discussion using the form below or calling 020 7465 1900.
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