A6.420 Use of a contract settlement to close an enquiry
If the taxpayer is prepared to agree with the officer's findings, he is usually invited to enter into a contract settlement. This is a contract to pay any additional tax (including National Insurance contributions) resulting from the enquiry or investigation, together with interest and, where appropriate, penalties. Note, however, that in some cases a deed might be used (see A6.419A).
Although the issue of a closure notice (see A6.418A) at the end of an enquiry is a statutory requirement, HMRC dispense with this in cases where matters are concluded by way of contract settlement1, because a contract settlement will be treated for all purposes as a closure notice2.
Before taxpayers are charged penalties under FA 2007, Sch 24 and FA 2008, Sch 41 HMRC should send a Penalty Explanation Letter (PEL). In penalty assessment cases a PEL must be sent. However, the PEL is not mandatory in contract settlement cases (unless the contract settlement includes a suspended penalty (see A4.567E) but if it is not used, an alternative record must be kept of the explanation given of the penalty decisions3. HMRC guidance on contract settlements can be found at EM6000 onwards, with details on penalties and their possible abatement at EM6050 onwards.
Steps to agreeing a contract settlement
A contract normally requires consideration to make it binding. The consideration for a contract settlement is a the taxpayer's offer to pay which is matched by HMRC's agreement not to take any further proceedings for