The government plans to impose a deadline on City firms over settling a long-running tax dispute that involves hundreds of millions of pounds in unpaid taxes and national insurance contributions on employee bonuses.

City institutions will be given two months to settle the cases by paying the national insurance contributions demanded by HM Revenue & Customs. If they fail to comply with the demand they face the threat of legal action and a much larger bill.

Some tax professionals said the HMRC's offer of a settlement suggested a lack of confidence in its legal position. A leading adviser said: “This is a partial amnesty, which I have not previously seen on this scale with so few conditions.”

The proposal concerns two schemes that were widely used in the City to save hundreds of millions of pounds in contributions and, in many cases, income tax.

The highly complex schemes involved special vehicles in conjunction with dividend payments or “adjustable options”.

The deadline of December 9 precedes a Special Commissioners' hearing, the first step in deciding the legality of the “adjustable options” scheme.

If companies settle by the deadline they will only be asked to pay the contributions demanded by HMRC.

If they do not settle and the schemes are found to be illegal the firms could face bills for both contributions and income tax of twice that amount.

Advisers said some clients appeared unwilling to settle because they believed they had a strong legal case.

However, many City institutions have created a provision for the potential tax liability and would prefer to clear up the issue to avoid any risk to their reputation resulting from a court case.

HMRC said its offer of settlement was not an ultimatum. It was intended to show that it was not prepared to accept less than 100 per cent of the contributions due.

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