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  • What is the state of play with HMRC’s so called? “nudge letters”

    As HMRC gathers it’s thoughts on how to narrow the tax gap and recover monies used to assist individuals and businesses throughout the COVID pandemic, how much attention should be paid to the recent outpouring of HMRC’s letters suggesting people should check their tax affairs for errors?

    In some respects, this may seem a lazy approach by HMRC.  If they have the data, which they invariably will, why not just open an enquiry and assess the tax they believe to be due at the end of it?  The thing is, it’s not quite as simple as that for HMRC.  Open the wrong kind of enquiry without all the facts and an appeal will go in to have it closed down on the basis no discovery has been made and HMRC are simply fishing for information.  Open a s.9A enquiry into the last tax return submitted and hope an error is there, such that they could then argue that a discovery has been made that will also be in earlier years.  But that takes time and resources, neither of which HMRC have an awful lot spare at the moment.

    But what if there was a way of pursuading the taxpayer to come clean and make a disclosure all on their own and pay the tax, interest and penalties straight away?  A simple tick and check review can then be done by HMRC without the need for a lengthy enquiry if the disclosure closely matches the information on file?  Why not send them a letter suggesting they need to check their tax affairs, due to information HMRC hold on them, and asking if they wish to come forwards, almost voluntarily? 

    And so about a decace ago, the first of the HMRC  “nudge letters” were issued.

    So, these are certainly not new and have been around for years in many guises, in varying degrees of confrontational language, but there has been a noticeable increase in the last few months in terms of the number of letters HMRC have been issuing and the areas of risk being covered.  Also noticeable is the letters are more targetted and often result in disclosures being made, previosuly it seemed a bit of a general scattergun approach and some letters were sent simply on the basis a person had declared certain types of income and HMRC was suggesting they check the figures again.

    HMRC’s information gathering is getting ever more sophisticated and accuraate.  It’s Connect system is bringing together information from a variety of sources, both UK and overseas, to identify those it determines have a risk of undeclared income or gains.

    In recent months, HMRC have issued “nudge letters” to the following groups of individuals and businesses:-

    • Undeclared capital gains on the sale of land and property in 2018/19 tax year
    • Undeclared income or gains from overseas assets
    • Incorrect claims under the furloughing (CJRS) or SEISS schemes
    • Making Tax Digital (MTD) for VAT
    • Use of the Profit Diversion Compliance Facility (transfer pricing, diverted profits tax, etc.)

    This marks a significant increase in HMRC’s activities, but is there a more sinisiter approach here by HMRC should anyone not respond to these letters and it is later found that there were errors that needed to be corrected?

    Even if a disclosure is made following receipt of a letter, HMRC will treat this as a prompted disclosure, immediately meaning increased penalties.  But where it is later found that a disclosure should have been made but wasn’t, will HMRC seek to charge a penalty based on deliberate behaviour on the basis the taxpayer was warned there may be issues but chose not to do anything about it?  Some recent HMRC enquries appear to have taken guidance from a sepcial department that comes up with reasons for deliberate behaviour, often with bizarre or untenable arguments, to ensure both a higher penalty and the ability to assess tax for up to 20 years.

    The letters invariably cause a lot of stress and panic amongst those who have nothing to disclose, but will often need professional advice to confirm this.  It would be interesting to obtain the statistics for the number of “nudge letters” which received a response, and how their responses broke down into people making disclosures.

    We have received a lot of enquiries recently where it transpired that disclosures were required for overseas income or gains, in some cases comparatively small ones, simply because of misunderstandings of whether income or gains needed to be declared.  Whilst there was no intention to avoid paying tax, they will now be potentially exposed for the severe penalties applicable under the Failure to Correct legislation of up to 200% applicable to disclosures of overseas income.  In most cases these can be mitigated, but under the wording of the legislation, unless reasonable care can be demonstrated to have been taken, the penalty will not drop below 100% of the tax due.

    For now, the main advice for anyone who has received one of these “nudge letters” is to speak to a professional advisor if they have any concerns about their situation.    Even if you have not received a letter but are concerned that you still need to make a disclosure, doing so before receving an HMRC letter will result in lower penalties so advice should again be sought. Our team at ETC Tax can provide advice where there is concern that a disclosure is required for any of the “nudge letters” received by HMRC.  Please contact Chris Watts, who has extensive experience of dealing with HMRC invesitgations, disputes and disclosures at