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Kyte – how to treat HMRC assurances that fall short of a contractual agreement

Posted on 3 July 2018

Kyte – how to treat HMRC assurances that fall short of a contractual agreement

Taxpayers may settle tax disputes with HMRC by way of contractual agreement and the normal rules of contract law govern whether a binding agreement has been reached. However, the High Court's judgment in Kyte v HMRC [2018] EWHC 1147 (Ch) is a reminder that even when a taxpayer believes a dispute with HMRC has been settled, issues can sometimes still arise.

In Kyte, the taxpayer had entered into a tax mitigation scheme involving the purchase of rights in the Frost Nixon movie. The taxpayer claimed sideways loss relief which he considered to be a trading loss. HMRC opened enquiries into the taxpayer's returns.

The taxpayer's advisers sought to agree adjustments to the taxpayer's returns. In January 2016, HMRC e-mailed calculations to the advisers and details of the amendments. A week later, the advisers responded and stated that the taxpayer "would like to go ahead with the settlement". The advisers also asked for a draft settlement deed and requested that the terms of payment would be over a nine month period. The taxpayer argued that this satisfied normal principles of contract law, which require a valid offer and acceptance, the intention to create legal relations and sufficient legal certainty. HMRC disagreed.

The Court found against the taxpayer. The Court held that the email containing calculations and details of the amendments was not a valid offer, it being some distance from a commitment to certain terms. The Court further held that the adviser's statement that the taxpayer "would like to go ahead with the settlement" was equally uncertain and that the exchange of correspondence lacked the degree of precision necessary to form a legally binding contract. The Court concluded that the request for a draft settlement deed indicated further that, at that point in time, settlement discussions were at a preliminary stage and there was not yet a sufficiently firm intention to create legal relations necessary to form a settlement agreement.

This case reminds taxpayers that reaching agreement in principle (or engaging in a course of settlement-related correspondence) can mean little to HMRC. Taxpayers cannot therefore safely rely on informal exchanges or assurances which fall short of a formal binding agreement. So if discussions only foreshadow a final agreement, a taxpayer should always seek clarity as to the express terms of any settlement as well as a clear and documented agreement.

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