Do you really have HMRC’s agreement?

By | 23 September 2019

‘Get it in writing’ is common advice where (say) two parties are seeking a legally binding agreement.

Contract settlements

For example, this can apply when an individual taxpayer is trying to finalise their tax position with HM Revenue and Customs (HMRC) following a tax return enquiry. The taxpayer and HMRC may agree to a ‘contract settlement’ (or ‘letter of offer’) setting out the tax, interest and penalties (if appropriate) to which the taxpayer is liable.

At the end of an enquiry, HMRC normally issues the individual with a closure notice (under TMA 1970, s 28A(1)). However, there is no explicit obligation for HMRC to serve a closure notice (although the taxpayer may apply to the First-tier Tribunal for a direction requiring HMRC to issue a closure notice within a specified period), and contract settlements are sometimes used instead (e.g. as an administrative convenience, particularly if HMRC’s enquiries cover a number of tax years).

Binding and enforceable?

HMRC guidance (in its Enquiry Manual at EM6301 and following) indicates out that, to be effective, a tax enquiry settlement must result in a legally binding and enforceable agreement between the taxpayer and HMRC. The contract comes into existence when it is signed by (or on behalf of) the taxpayer and is accepted by (or on behalf of) HMRC.

Furthermore, HMRC generally requires a letter of offer to be made on (plain) paper. However, in Kyte v Revenue and Customs [2018] EWHC 1146 (Ch), the taxpayer tried to argue that an exchange of emails between HMRC and the taxpayer’s advisers constituted a binding contract settlement. Unfortunately, the taxpayer was unsuccessful, not because the exchanges were by email as opposed to paper, but because they did not contain the necessary elements to constitute a valid contract.

In that case, the taxpayer invested in a tax mitigation scheme (‘the Scion Scheme’) in the tax year 2007/08, involving the purchase of certain rights in a film. HMRC opened enquiries into some of the claimant’s tax returns and disputed the effectiveness of the Scion Scheme. There was a chain of correspondence between HMRC and the taxpayer’s advisers, commencing with a letter from HMRC to the taxpayer in January 2013 inviting him to contact HMRC to discuss a settlement opportunity.

On 4 January 2016, an HMRC officer emailed the taxpayer’s adviser with copies of tax calculations and notes detailing amendments to each relevant tax year. The net sum was £316,955. On 12 January 2016, the taxpayer’s adviser replied to HMRC stating that the taxpayer “…would like to go ahead with the settlement on Scion in accordance with your figures. Could you please let us have the settlement deed.” The email also asked if the claimant could pay the sum of £316,955 over a nine-month period. The taxpayer later applied to the High Court claiming that this email exchange between HMRC and his adviser achieved a binding agreement.

Binding contract elements

The court noted that the correspondence between the parties started with notification from HMRC that there was a ‘settlement opportunity’ and a willingness to discuss entering into an agreement. The court considered that the language was clearly equivocal. The court also observed that communications prior to the ‘offer’ and ‘acceptance’ email had a degree of informality about them. The court found that the language used in HMRC’s email of 4 January 2016 was some considerable distance from the type of language which could be described as ‘promissory language’ or the language of commitment.

Furthermore, the court considered that even if there was an offer, the language contained in the adviser’s email of 12 January 2016 was plainly equivocal. It followed that the terms included in the exchange of emails lacked a sufficient degree of precision to enable them to amount to a binding contract. Finally, even if the court accepted that all the other elements of a binding contract were present (which it did not), the ‘acceptance’ element was conditional upon a further document to conclude the agreement (i.e. the adviser requested HMRC to provide a draft settlement deed). The taxpayer’s claim failed.

The importance of legally binding contract settlements (albeit in the context of HMRC enquiries) is underlined by HMRC’s Enquiry manual, which devotes a whole section of guidance to the subject (EM6300-EM6339).

Practical point

In Kyte, the taxpayer attempted to bind HMRC to specific settlement terms. Conversely, in some cases HMRC may wish to bind a taxpayer to terms which have previously been discussed. However, the taxpayer may prevent this by marking the settlement offer ‘without prejudice’. HMRC’s guidance instructs its officers (at EM6321): “a taxpayer who marks an offer ‘without prejudice’ does so to prevent the offer from being used subsequently. If you do not accept the offer you cannot use it as evidence that, for example, certain figures have been agreed.” Taxpayers should seek legal advice on any contract law issues, if necessary.

The above article was first published in Business Tax Insider (October 2018) (