A nudge letter from HMRC is simply a method of addressing discrepancies in your tax filings. These letters are not legally binding, but they serve as a prompt for you to review and correct your tax records.
The “Nudge Unit,” officially known as the Behavioural Insights Team (BIT)[1]Trusted Source – GOV.UK – HMRC BIT, was originally created to apply insights from behavioural economics and psychology to improve government policy and services.
A nudge letter can be sent to companies, non-resident corporate landlords and charities.
Why does HMRC Send Nudge Letters?
Receiving a nudge letter typically means HMRC has detected a mismatch between the information you reported and their data. This could be due to various reasons, such as undeclared income or incorrect tax credit claims. It’s HMRC’s way of saying, “Please double-check your records; we think there’s an error.”
Types
Some common types of nudge letters being sent in 2024 include the following:
Overseas Assets: Letters targeting individuals with undisclosed foreign income or assets.
Cryptocurrency: Letters focusing on individuals who have bought, sold, or exchanged digital assets.
Short-Term Property Letting: Letters reminding taxpayers to declare income from short-term rentals, such as Airbnb.
Business Asset Disposal Relief: Letters questioning claims for this relief, which reduces Capital Gains Tax on qualifying business assets.
Research and Development (R&D) Claims: Letters querying potentially incorrect or inflated R&D tax relief claims.
Online Marketplace Earnings: Letters reminding sellers on platforms like eBay or Amazon to declare income and pay taxes.
Underdeclared Dividend Income – Letters querying potential undeclared dividend payments, based on an analysis of company accounts showing a decrease in reserves despite profits, suggesting that a dividend or distribution may have been paid out.
Electronic Sales Suppression (ESS) Tools: Letters targeting businesses suspected of using ESS software or devices to manipulate sales records and reduce reported revenue, leading to underpayment of taxes.
How to Respond to an HMRC Nudge Letter?
Here are some key steps to follow when responding to a nudge letter from HMRC:
Carefully review the letter
Make notes on what information they are requesting. Gather all relevant records, paperwork, calculations, etc. that support your position or explain the discrepancy. Having a paper trail is crucial. If you made an error, be upfront about it in your response.
If you disagree with HMRC’s position
Don’t be argumentative when pointing out the error; state your case objectively. Seek professional help from an accountant or tax advisor if the issues are complex.
Correcting Your Position
If you agree with HMRC’s findings and need to correct your tax position, there are several ways to do so. You may need to amend previously submitted returns , or disclose the issue to HMRC outside the tax return process using their digital disclosure service.
I also recommend seeking professional advice from a qualified tax expert or accountant. We can help you better understand the case against you, ensure that any penalties are appropriate to your infraction, and make disclosures to HMRC in the most appropriate manner.
What are the Potential Consequences of Ignoring a Nudge Letter?
Ignoring a nudge letter risks escalation to formal enquiries or investigations, where HMRC has the authority to look deeper into your tax affairs.
If discrepancies are proven and deemed be a consequence of non-compliance or evasion, this could lead to significant penalties or charges.
If you’re uncertain about any aspect, our recommendation is to call HMRC using the dedicated reference number printed on the nudge letter. They always respond better to clear communication than being ignored, and they are usually very helpful and open to discussion.
Is a Nudge Letter an HMRC Tax Investigation?
A nudge letter is not a tax investigation; it is a way to prompt compliance and correction rather than formal proceedings of a tax investigation.
However, if discrepancies persist or are found to be significant upon review, they could potentially escalate to a formal tax investigation later on.
FAQs about HMRC Nudge Letters
How should I verify the authenticity of a nudge letter?
Verify a nudge letter by checking its details against your HMRC online account or contacting HMRC directly through official contact points listed on their website. This helps ensure the letter is legitimate and not a phishing attempt.
What are the typical errors that trigger a nudge letter?
Common errors triggering a nudge letter include undeclared income, incorrect tax deductions, or discrepancies between reported figures and those observed by HMRC through other data sources.
Can ignoring a nudge letter affect my credit score?
Ignoring a nudge letter itself does not directly impact your credit score. However, unresolved tax issues leading to financial penalties or legal actions might eventually affect your credit rating.
What resources does HMRC offer to help with compliance?
HMRC provides various resources for compliance, including detailed guides on their website, webinars, and direct consultation services to help taxpayers understand their obligations and how to comply with them.
Are there any penalties for late responses to nudge letters?
While nudge letters do not impose penalties for late responses, failing to address the issues highlighted might lead to formal audits and subsequent penalties if discrepancies are confirmed and deemed due to negligence or evasion.
