HMRC’s Litigation and Settlement Strategy (LSS) is the framework HMRC uses to resolve every civil tax dispute, whether the dispute ends by agreement or in a tribunal. Its core rule is that HMRC will only settle on terms it believes a tribunal could reasonably reach: it will not split the difference on an all or nothing point, will not trade one issue against another, and will normally concede a point it expects to lose. Negotiating with HMRC is therefore about the facts and the law, not about haggling over a number.

What is the Litigation and Settlement Strategy?

HMRC’s internal LSS guidance describes the strategy as the framework within which HMRC resolves tax disputes through civil law processes and procedures in accordance with the law. It applies from the very beginning of any compliance activity, once risk assessment has taken place, and the word “tax” covers all taxes, duties, interest and penalties (LSS20200). It does not apply to cases handled through criminal proceedings.

A “dispute” is given a wide meaning. It covers situations where HMRC needs more information to form a view, and situations where HMRC and the taxpayer hold different views on the legally due tax at the right time (LSS20300). Disagreements over several unrelated risks are treated as separate disputes, and statutory reviews do not count as litigation. HMRC’s Code of Governance for Resolving Tax Disputes records that the LSS was first published in 2007.

How does HMRC decide whether a dispute is worth pursuing?

The starting point is that HMRC will not take a dispute forward unless the overall revenue flows potentially involved justify it (LSS20500). The factors HMRC lists at LSS20400 include:

  • the tax at stake for this taxpayer in the current, earlier and later years;
  • the tax at stake for other taxpayers, including the effect on wider behaviour;
  • an early assessment of the impact compared with the cost of pursuing or dropping the dispute;
  • an impartial assessment of the strength of HMRC’s case; and
  • any decision already made by an HMRC governance body.

HMRC should only continue where both the likely revenue justifies it and it has, or potentially has, a case it believes would succeed in litigation. LSS20500 also says HMRC should not pursue minor or questionable points to avoid a nil settlement. There are exceptions where small sums are still pursued: fixed penalty disputes where HMRC wants to influence behaviour, important points of principle needed to defend the legislation, and cases where dropping the point could distort competition between businesses.

HMRC’s power simply to forgo tax is narrow. LSS10100 explains that the collection and management discretion in section 5 of the Commissioners for Revenue and Customs Act 2005 allows tax to be forgone only exceptionally, giving the example of tax of £50 that would cost £500 to collect.

When will HMRC concede a point?

LSS40100 sets out the rule for genuinely all or nothing disputes. If HMRC believes it would be likely to succeed in litigation, and litigation would be effective and efficient, it will not settle out of court for less than 100 per cent of the tax, interest and penalties at stake. If HMRC believes it would be unlikely to succeed, it will in most cases concede the issue.

That second half is the part taxpayers and agents should use. If you can show, in writing and with authority, that HMRC’s analysis is unlikely to survive a tribunal, the LSS points HMRC towards withdrawing rather than compromising. LSS30600 tells caseworkers to take specialist advice early so that, if HMRC’s arguments are not strong, it can withdraw as soon as possible. The exception is a point of wide importance: LSS50300 gives an example where HMRC should litigate even though its own legal advice suggests it may lose, because accepting the taxpayer’s treatment would affect a whole sector.

Why can HMRC not split the difference?

An all or nothing issue has only two possible outcomes: an amount is due or it is not. LSS40500 says HMRC must not accept any out of court resolution that splits the difference on such an issue. It also tells caseworkers to explore, preferably with the taxpayer, whether the issue can be broken into sub issues or whether there is in fact a range of right answers.

HMRC’s own example at LSS50100 shows how this works. Two expenses are in dispute: £90,000 claimed as marketing that HMRC says is client entertaining, and £100,000 claimed as revenue spending that HMRC says is capital, which might attract capital allowances of £18,000. Because each point is all or nothing, only six outcomes are possible, ranging from no adjustment to an increase in profits of £190,000. HMRC could not agree an increase of £86,000 as a 50/50 split across the two issues. If the marketing spend could be broken into categories, some of which were allowable, more outcomes would become available.

What if the right answer is a range of figures?

Many disputes are not binary. LSS40600 lists cases where turnover or profit is genuinely uncertain because records are incomplete, provisions that require a just and reasonable apportionment, valuation and transfer pricing disputes, and partial exemption methods for VAT. In these cases HMRC may settle for any figure it considers a likely outcome of litigation, but LSS40200 says it cannot settle for a result it does not believe to be one of that range, and will not accept less in the interest of a quick settlement.

Where a dispute has a few discrete possible outcomes, LSS20600 says HMRC may settle for any of them but not for an amount in between. Its example is a dispute where £100,000, £200,000 or £250,000 could be due; £150,000 would not be allowed.

Why will HMRC not agree a package deal?

LSS40400 prohibits any agreement where HMRC concedes one issue in return for the taxpayer conceding another, and any single payment that is not divided between the individual disputes. Each dispute is decided on its own merits, although genuine interaction between issues can be reflected. The Code of Governance puts it bluntly: HMRC does not “do deals”.

The same paragraph protects the identity of penalties. A penalty cannot be forgone or absorbed into the settlement, and HMRC cannot accept a higher tax figure offered in place of a penalty. The way a settlement is put into effect must also follow the law: LSS40300 notes that VAT and VAT penalties cannot be included in a contract settlement and must be assessed formally.

Who inside HMRC signs off a settlement?

Under the Code of Governance, most resolution decisions are taken by caseworkers with their managers’ agreement, escalating to deputy directors and directors where consensus is not reached. Larger disputes go to boards that are independent of the case team:

Body Main trigger
Customer Compliance Group Disputes Resolution Board Tax at stake in a dispute above £5 million (non Large Business customers) or £15 million (Large Business customers)
Tax Disputes Resolution Board, reporting to three Commissioners Total tax at stake in all ongoing disputes with a customer above £100 million, a risk with a maximum potential adjustment of at least £500 million, or other referral criteria

The Tax Assurance Commissioner, a role in place since 2012, has no responsibility for managing individual taxpayers’ affairs and reports to Parliament each year on how disputes were resolved. For most smaller businesses the caseworker and manager decide, applying the same rules.

How should you use the LSS in a negotiation?

The LSS expects collaboration. LSS30200 lists what that can include: agreeing a timetable with milestones, agreeing the key questions, narrowing the points in dispute, drafting an agreed statement of facts and considering alternative dispute resolution. Practical points that follow from the guidance:

  1. Ask HMRC to state the risk. LSS30300 says caseworkers should explain what they think may be wrong and why. Push for a clear statement of each issue so it can be treated as a separate dispute.
  2. Break all or nothing issues down. Show that an expense or transaction has components with different answers. This is the only legitimate way to create middle ground.
  3. Put the law in writing. HMRC is told to test the relative strength of each side’s technical analysis before deciding (LSS30700). A reasoned submission gives it something to test.
  4. Remember the witness. LSS30500 warns caseworkers that tribunal judges usually give great weight to oral evidence given under oath, and that HMRC should presume the tribunal will take it at face value unless there is good reason not to. Credible evidence from the business owner can change HMRC’s view of its litigation risk.
  5. Do not offer a round sum. An offer that is not tied to a recognised outcome of each issue cannot be accepted under the LSS, however commercially sensible it looks.

If agreement cannot be reached, the dispute moves to a statutory review or the tax tribunal, where the cost position is covered in costs in tax tribunal appeals. Your rights during the process are set out in the HMRC Charter.

What are the common mistakes?

  • Treating the caseworker’s figure as an opening bid. Under the LSS it is meant to be HMRC’s view of the right answer, and movement needs a reason.
  • Linking unrelated issues (“we will accept the car benefit point if you drop the loan account point”). HMRC is barred from agreeing that.
  • Assuming HMRC will settle small amounts to save time when behaviour or principle is in issue.
  • Holding back the strongest argument until the tribunal. HMRC can only withdraw early from a weak position if it sees your case.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.