Introduction: What an HMRC Contract Settlement Means for Americans in Britain
An HMRC contract settlement is the binding agreement that closes most UK tax enquiries and offshore disclosures, and for an American living in Britain it has a second life on the US return that almost nobody plans for. You sign a letter of offer, HMRC accepts it, and the years it covers are settled. However, the money you pay under that contract is a mix of tax, interest and penalties, and the IRS treats each part differently. Get the split and the timing right, and the UK tax can come back to you as US foreign tax credits. Get it wrong, and you may pay full tax in both countries on the same income.
Most published guidance on the HMRC contract settlement is written for purely British taxpayers. It explains the letter of offer, the instalment maths and what happens if you default. By contrast, it never asks what the settlement does to a Form 1116, whether the payment is "compulsory" in the IRS sense, or why an American who elected the accrual method years ago may recover six figures that a cash-method filer loses. At TaxYork, we prepare both sets of returns for investors, bankers and company owners, so we see the two systems collide on the same file. This guide covers the UK mechanics in full and then follows the money onto your US return.
Why an HMRC Contract Settlement Is Not a Tax Assessment
Legally, an HMRC contract settlement is a contract, not an assessment. HMRC's Enquiry Manual at EM6001 describes it as a written agreement under which HMRC gives up its right to pursue formal assessments in exchange for your promise to pay an agreed sum. Consequently, the debt you owe afterwards is a contract debt, and the years covered become final in much the same way as if HMRC had issued a closure notice.
This distinction matters for three reasons. First, there is no appeal against a contract you have signed, so every argument must be won before you sign. Second, the contract can include amounts HMRC could not legally assess, but only if you agree to pay them. Third, the IRS looks behind the label: it wants to know how much of the global sum is genuine income tax for each year, because only that part can ever be credited.
Who Typically Receives a Letter of Offer
In our experience, Americans in Britain meet a letter of offer at the end of four routes. The most common is a voluntary disclosure through the Worldwide Disclosure Facility, often after an offshore nudge letter from HMRC. Alternatively, the offer may close an ordinary enquiry into a self-assessment return, a Code of Practice 8 investigation, or a Code of Practice 9 case under the Contractual Disclosure Facility. Whatever the route, the final document looks broadly the same, and so does its effect on your US filings.
How HMRC Builds the Figure in an HMRC Contract Settlement
Before HMRC sends a letter of offer for an HMRC contract settlement, an officer calculates what the manual calls the "expected offer". Put simply, this is the total HMRC believes you should pay: the unpaid tax for every year in scope, statutory interest on that tax, and any penalties. Understanding how each element is built is the only way to challenge the figure while you still can.
Tax, Time Limits and Voluntary Restitution
The tax element covers each year HMRC could legally assess. Ordinarily, that means four years, extended to six for careless errors and twenty for deliberate ones. For offshore income and gains, section 36A of the Taxes Management Act 1970 can stretch the careless and innocent window to twelve years. Notably, an HMRC contract settlement may also include tax for years outside these limits, but only on a voluntary restitution basis. HMRC's guidance at EM6370 says such a suggestion should not be pressed if you decline.
For a US taxpayer, voluntary restitution raises a sharp question. A payment HMRC could not have enforced is very hard to describe as a compulsory foreign tax. Therefore, before agreeing to include out-of-time years, ask whether that money will ever earn a US credit. In most cases it will not.
Interest and the Late Payment Rate
Statutory interest runs on each year's tax from its original due date until payment. Since 6 April 2025, HMRC's late payment interest has been set at Bank of England base rate plus four percentage points, and the current figure appears on the HMRC interest rates page. Over a six-year disclosure, interest can easily reach a fifth of the tax. Importantly, none of it will ever be creditable in the United States.
Penalties Under Schedule 24
Penalties inside an HMRC contract settlement for inaccurate returns sit in Schedule 24 to the Finance Act 2007. The USA is a category 1 territory, so the offshore ranges match the domestic ones. A careless error disclosed without prompting can carry a penalty from 0% to 30% of the tax, rising to a 15% floor once HMRC has prompted you. Deliberate errors run from 20% to 70%, and deliberate and concealed errors from 30% to 100%. HMRC's factsheet on penalties for inaccuracies explains how the quality of disclosure reduces the percentage. Moreover, where offshore tax from before April 2017 was not corrected by September 2018, the failure to correct regime can push penalties to 200%.
Inside the Letter of Offer for an HMRC Contract Settlement
The letter of offer is the document you sign to create the HMRC contract settlement. Although HMRC drafts it, the offer is legally yours, because you are offering to pay a sum in return for HMRC's agreement not to proceed formally. HMRC's own checklist at EM6310 requires the letter to be clear and unambiguous, to state the consideration, to list every duty taken into account, and to refer to your default.
The Schedule That Matters Most to the IRS
Every HMRC contract settlement should be supported by a computation showing the tax, interest and penalty for each year and each duty. For a British client, that schedule is a formality. For an American, it is the single most valuable page in the file. Without it, you cannot show the IRS how much UK income tax relates to each US year, which income it was charged on, or which foreign tax credit category it belongs in. Consequently, insist on a year-by-year breakdown that separates income tax from capital gains tax, savings income from dividends, and tax from interest and penalties.
Paying in Full or by Instalments
HMRC normally expects an HMRC contract settlement to be paid within 30 days of its letter of acceptance. Exceptionally, EM6235 allows up to six months where you need time to raise funds. Alternatively, HMRC may agree an instalment offer. In that case, it adds forward interest to compensate for the delay and the collection risk. According to EM6250, the basic method adds interest at the current late payment rate for half the payment period. For contracts agreed on or after 8 May 2026, forward interest applies only to the interest-bearing part of the offer, which reduces the cost of early settlement.
For a US filer, the instalment decision is also a timing decision. As we explain below, the year in which you pay can determine whether a credit is usable at all. Therefore, the payment schedule deserves the same scrutiny as the headline figure.
Means, Assets Abroad and Leaving the UK
HMRC tests whether you can afford the expected offer before it agrees any HMRC contract settlement. Where you have moved abroad, or hold most of your wealth outside Britain, EM6231 makes clear that HMRC will not accept a materially reduced offer simply because collecting debts overseas is difficult. Its stated reason is that doing so would give you clearance to return to the UK with impunity. Accordingly, Americans planning to relocate to New York or Florida should not expect a discount for leaving.
After You Sign: Finality, Reopening and Default
Once HMRC accepts your offer, the HMRC contract settlement is binding on both sides. For an American client, three post-settlement questions come up repeatedly: can HMRC come back, can you come back, and what happens if the money runs out.
Finality and the Discovery Rule
An accepted HMRC contract settlement has the same effect as a closure notice for the years it covers. In practice, HMRC cannot reopen those years unless the discovery conditions are met, for example because you withheld information. This is why the certificate of full disclosure and the statement of assets that accompany many settlements matter so much. A false certificate can lead to a criminal investigation, and it removes the protection the contract was meant to give you.
Reopening a Settlement to Claim a Relief
Occasionally, you will want to reopen an HMRC contract settlement yourself. HMRC's guidance at EM6413 says a settlement should be reopened to allow a valid relief claim that would have altered a formal assessment, such as an overpayment or loss relief claim. Importantly, the claim must still meet its statutory time limit, and doubts about the settlement calculation are not grounds. For the time limit, liabilities that could have been assessed are treated as assessed on the date HMRC accepted the offer.
This rule matters where US tax should have reduced the UK figure. If HMRC's computation ignored US tax paid on US-source income that the treaty requires Britain to credit, a properly framed claim may reopen it. Otherwise, you have paid UK tax the treaty did not require, and that excess may not be creditable in the US either.
Missing a Payment
If you cannot keep up the instalments on an HMRC contract settlement, EM6418 treats the default primarily as a debt recovery matter, handled by HMRC's Contract Settlements Unit, which will not rework the contract. Only exceptionally, where your circumstances genuinely change, will an officer propose a longer payment period with extra interest. Hence, an unrealistic schedule agreed under pressure can become far more expensive later. Our guide to Time to Pay arrangements with HMRC explains the parallel route for ordinary tax debts.
Turning an HMRC Contract Settlement Into US Foreign Tax Credits
This is where the cross-border value lies. As a US citizen or green card holder resident in Britain, you report your worldwide income to the IRS and usually rely on credits for UK tax to avoid paying twice. An HMRC contract settlement often adds tens or hundreds of thousands of pounds of UK tax for years whose US returns are already filed. Whether that tax becomes a credit depends on four rules that no UK-facing guide explains.
Only the Tax Element Is Creditable
Treasury Regulation 1.901-2(a)(2)(i) states plainly that "a penalty, fine, interest, or similar obligation is not a tax." You can read it in the foreign income tax regulation at section 1.901-2. Consequently, the statutory interest, the forward interest on instalments and every Schedule 24 penalty in your HMRC contract settlement are simply costs. Nor, for most individuals, are they deductible on a US return. Only the income tax and capital gains tax elements can generate a credit, which is another reason the year-by-year schedule is essential.
The Compulsory Payment Rule and Settled Issues
The IRS credits only a "compulsory payment", and every HMRC contract settlement is tested against that rule. Under Regulation 1.901-2(e)(5)(i), any amount paid in excess of your liability under foreign law, interpreted reasonably and including the treaty, is not tax at all. Furthermore, you are expected to exhaust effective and practical remedies, including competent authority, to reduce that liability. Helpfully, the same regulation provides that a settlement of two or more issues is evaluated on an overall basis rather than issue by issue.
In practice, this means you can give and take in negotiation without losing credits, provided the overall result is a reasonable reading of UK law. By contrast, conceding a weak HMRC point simply to close the file, or agreeing voluntary restitution for out-of-time years, can turn part of the payment into a non-creditable gift to the Exchequer. Therefore, document your reasoning on any disputed item before you sign.
Cash Method Versus Accrual Method: The Timing Trap
The method you use for foreign tax credits decides where the credit lands. Under Regulation 1.905-1(c), set out in the foreign tax credit timing rules, a cash-method taxpayer claims additional foreign tax only in the year it is actually paid. So UK tax for 2018/19 paid under a 2026 contract is a 2026 credit, limited by your 2026 foreign-source income in the same category. For a UK resident whose current UK tax already exceeds US tax, there is rarely any spare limitation in the payment year. The excess carries back one year and forward ten, but it often never gets used.
Conversely, if you have elected to claim credits on the accrual basis, which many Americans in Britain do on Form 1116, additional tax "relates back" to the year it was imposed under Regulation 1.905-1(d). However, section 905(c)(2) of the Internal Revenue Code treats tax not paid within 24 months of the end of its year as refunded until it is paid. Once you pay under the settlement, the credit returns to the original years. You then claim it on Form 1040-X amended returns for each affected year, within the special ten-year refund window for foreign tax credits.
Instalments and the Relation-Back Years
Instalments under an HMRC contract settlement complicate both methods. A cash-method filer gets a credit only for the instalments paid in each year, which can occasionally help if you spread payments into years with spare limitation. An accrual-method filer, meanwhile, gets the credit in the relation-back year only as each instalment is paid. As a result, a five-year instalment plan can mean five rounds of amended returns. Lump-sum settlement is usually simpler and, where you have elected accrual, faster to convert into US refunds.
The US Reporting That Must Match Your HMRC Contract Settlement
A UK disclosure that ends in an HMRC contract settlement rarely involves only UK tax. If HMRC found unreported offshore accounts, the IRS may never have seen them either. Equally, the facts you admit to HMRC will be read alongside your US position.
FBAR, Form 8938 and Funds
Any non-US account that appears in the disclosure must also appear on your FBAR filed with FinCEN and, above the thresholds, on Form 8938. Where the portfolio holds non-US funds, missed Form 8621 filings for passive foreign investment companies can keep the US statute open indefinitely. Our team handles FBAR and FATCA reporting and the related information returns alongside the UK work, so that every figure reconciles.
The Admission Problem
What you say to HMRC can limit what you can say to the IRS. A Worldwide Disclosure Facility submission allows you to classify behaviour as careless or deliberate. By contrast, a Code of Practice 9 contract requires an admission of deliberate conduct, which sits awkwardly with the non-wilful certification the IRS requires under its Streamlined procedures. We explain that conflict in our guide to Code of Practice 9 for US filers. Where your US returns themselves are missing, our IRS Streamlined filing service covers the American catch-up.
Neither Agreement Binds the Other Country
An HMRC contract settlement binds only you and HMRC. The IRS is not a party, and it can take its own view of the same income. Likewise, an American settlement does not bind HMRC, as our guide to the IRS closing agreement explains. Where the two administrations tax the same income inconsistently, the remedy lies in the mutual agreement procedure under the US-UK double taxation convention.
Case Study: An Accrual Election Worth $112,000
Consider an illustrative client we will call Rebecca. She is a US citizen and a private equity partner who has lived in London since 2015. Since 2017, she has held a portfolio of directly owned equities and bonds worth about £2.4 million with a Jersey private bank. Her US returns reported the portfolio income and gains every year, and she filed FBARs and Form 8938 correctly. However, her former UK adviser assumed the portfolio was "dealt with in America", so her UK returns from 2018/19 to 2023/24 omitted it entirely.
After an offshore nudge letter in 2025, Rebecca made a disclosure through the Worldwide Disclosure Facility in February 2026, classifying the errors as careless. HMRC's initial computation included £14,000 of tax on a 2021 bond redemption that was in fact a return of capital. We documented the point, and HMRC removed it. Had she conceded it, that £14,000 would have been a non-compulsory payment with no US credit.
The final HMRC contract settlement, accepted in October 2026, comprised £96,000 of tax, £21,400 of interest and a 10% unprompted careless penalty of £9,600, a total of £127,000. She paid it in one sum. At an assumed rate of $1.33 to the pound, the tax element was about $127,700, while the interest and penalty, about $41,200, could never be credited.
Crucially, Rebecca had elected the accrual method on her Form 1116 back in 2016. The UK tax for each year therefore related back to US tax years 2019 to 2024. Across those six years, the US income tax on the same portfolio income came to about $112,000. We filed six amended returns claiming credits up to that limitation, and the remaining $15,700 of UK tax became a carryover. Her net investment income tax of about $19,000 remained payable, because foreign tax credits cannot offset it under the Internal Revenue Code.
Had she used the cash method, the entire $127,700 would have been a 2026 credit. Her 2026 limitation was already absorbed by UK tax on the now correctly reported portfolio, and the one-year carryback to 2025 was full for the same reason. In that scenario, we estimated she would have recovered almost nothing in the short term. The accrual election, made a decade earlier for unrelated reasons, was worth roughly $112,000 in US refunds.
A Pre-Signing Process for Americans Facing an HMRC Contract Settlement
Over many files, we have settled on a sequence for each HMRC contract settlement that protects the US position without delaying the UK settlement. It works whether the offer follows a disclosure, an enquiry or a Code of Practice case.
Before the Offer Is Agreed
Start by obtaining the year-by-year computation and reconciling it to your filed US returns, income type by income type. Next, check every past Form 1116 to confirm whether you elected the accrual method, since that election decides where the credits will land. Then, test each disputed item against the compulsory payment rule, and challenge anything you would be conceding merely for convenience. Finally, ask whether any out-of-time years are being included on a voluntary restitution basis, and price the fact that their tax will probably earn no credit.
Before You Choose a Payment Plan
Model the US effect of a lump sum against an instalment plan. For accrual-method filers, a single payment normally produces one clean round of amended returns. For cash-method filers, by contrast, consider whether payments can be timed into years with spare limitation, and whether a current-year accrual election would help. In addition, confirm that any treaty credit Britain owed you for US tax has been reflected in HMRC's figures, because reopening the settlement later is far harder.
After HMRC Accepts
Once the HMRC contract settlement is binding, diarise the amended US returns and the ten-year refund window. At the same time, correct any FBAR, Form 8938 or Form 8621 gaps the disclosure revealed, and keep the letter of offer, acceptance and computation with your US workpapers. If HMRC later repays any of the tax, remember that a refund is a foreign tax redetermination requiring US amendment, as our article on HMRC repayment interest touches on.
How TaxYork Can Help
We prepare UK self-assessment returns and US federal returns for high-net-worth Americans in Britain, so we can run a disclosure and its US consequences as one project. For an HMRC contract settlement, that means building the year-by-year computation HMRC needs, negotiating disputed items with the compulsory payment rule in mind, and then preparing the amended Form 1040-X returns and Form 1116 schedules that turn the UK tax into credits. We also deal with the FBAR, Form 8938 and fund reporting that offshore disclosures so often uncover.
Our clients include investment bankers, fund partners, company owners and accidental Americans with substantial UK and offshore assets. If you have received an offer letter, or expect one, the most valuable time to involve us is before you sign. Our US tax return preparation for expats and treaty work are designed for exactly these cross-border files.
Conclusion
An HMRC contract settlement ends the British side of a tax problem, but it starts an American one. The contract is final, it cannot be appealed, and its figures will be read by the IRS as well as by HMRC. Only the tax element can ever be credited, only if it was a compulsory payment, and only in the year your foreign tax credit method allows. For a wealthy American with several years in scope, those three rules can be worth more than the penalty negotiation itself.
Therefore, treat the letter of offer for any HMRC contract settlement as a cross-border document. Insist on a year-by-year schedule, resist concessions you cannot defend, check your accrual election, and plan the payment and the amended returns together. Done properly, much of the UK tax you pay can return as US refunds.
Contact Us
If HMRC has sent you a letter of offer, or you are preparing a disclosure that will end in an HMRC contract settlement, speak to us before you sign. We will review the computation, model the US credits and coordinate both sets of returns. Book a consultation with our US-UK team, email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article is for general information only and does not constitute tax, legal or investment advice. UK and US tax rules change frequently, and the right approach to any HMRC settlement depends on your own facts, filing history and the HMRC office involved. The case study is illustrative, and its figures are simplified and rounded. You should take professional advice on your specific circumstances before signing any letter of offer or filing any return. TaxYork accepts no liability for action taken or not taken on the basis of this article.