What is an HMRC settlement?
Answered 17 March 2026
Based on the retrieved sources, here is a comprehensive answer:
What is an HMRC Settlement?
An HMRC settlement (formally known as a contract settlement) is the mechanism by which HMRC and a taxpayer or employer resolve a tax liability following a compliance check or enquiry, without HMRC needing to use its formal statutory powers.
HMRC Guidance / Practice
Definition and Nature
A contract settlement is a legally binding agreement in which the taxpayer offers to pay everything that is due as a result of a compliance check, and HMRC agrees not to use its formal powers to recover that amount. Both parties must agree to it and to its terms.
What HMRC gives up
When HMRC makes a contract settlement, it gives up its right to proceed formally for the tax, interest, and penalties, in exchange for the taxpayer's payment.
Legal effect
Once a contract offer has been accepted, it has the same effect as the issue of a closure notice. The year(s) included in the contract become final, and HMRC will not be able to make any further enquiries into those years (unless the conditions for a discovery assessment are satisfied).
What it can cover
Contract settlements can cover years where:
- there are open enquiries,
- the enquiry window has closed,
- there are pre-Self Assessment liabilities, or
- a settlement has been agreed without opening an enquiry.
Penalties
HMRC's longstanding preference is for penalties for direct taxes to be included in an agreed contract settlement.
HMRC's approach
Throughout an enquiry, HMRC must engage positively with the taxpayer to try to reach agreement over additional tax and penalties due. Experience shows that an agreed settlement is more likely to be paid promptly.
Reopening a settlement
In limited circumstances, HMRC may reopen a settlement — for example, to allow an employer the benefit of any adjustment that could have been claimed had the liability been dealt with by formal assessment.
Note: The term "settlement" in a trust/inheritance tax context (as seen in some of the retrieved sources) has a completely different legal meaning — it refers to a legal arrangement placing assets under trust. The above answer addresses only the HMRC compliance/tax enquiry settlement concept.
Citation sources
It could be argued that where an employer has entered into a legally binding contract, any adjustment to the underlying figures should be precluded. This would place a cooperative employer at a disadvantage compared with an uncooperative employer against whom formal steps had to be taken at every stage who still has open to him all of the relieving provisions of the Taxes Acts. HMRC will be prepared to reopen a settlement to the extent necessary to allow an employer the benefit of any adjustment
After a compliance check has been carried out, HMRC will sometimes agree a contract settlement with an employer if they believe an employer owes money. The contract settlement is a legally binding agreement, where the employer offers to pay everything that is due as a result of the check, and HMRC agrees not to use formal powers to recover that amount. An employer can only pay through a contract settlement if both the employer and HMRC agree to it, and to the terms of the contract. If, as part o
HMRC’s longstanding and very practical preference is for penalties for direct taxes to be included in an agreed contract settlement. Throughout the enquiry, you must engage positively with the taxpayer to try to reach agreement over the additional amounts of tax and penalties that are due. It is important to ensure that the taxpayer is aware of their rights and safeguards the information powers available to HMRC, and the basis of our settlement proposals. Experience shows that an agreed settleme
When we make a contract settlement, HMRC gives up its right to proceed formally for the tax, interest, penalties, in exchange for the taxpayer’s money. Once a contract offer has been accepted, it has the same effect as the issue of a closure notice. The year(s) included in the contract become final, and you will not be able to make any further enquiries into those years, see EM1530, unless you consider that the conditions for making a discovery assessment are satisfied, see EM3200+. Provided we