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Have you received a nudge letter from HMRC? This can be a worrying communication for both individuals and company directors. But, don’t rush into making any decisions on disclosure, check the letter carefully and what the deadline is, collect all the relevant information such as your tax return and records, and if necessary, take advice on the correct response.

HMRC sends nudge letters as a reminder to companies and individuals that their tax liabilities need to be reviewed. These are not sent out unprompted and they will be triggered by a potential anomaly on a self-assessment form or other intelligence that suggests more payment is owed. The letters are not legally binding, but they are serious in tone and will also warn of the dangers of making fraudulent disclosures and that this could result in penalties being imposed and at worst, in criminal prosecution 

Along with the letter, a ‘Certificate of Tax Position’ will be included, with a request for this to be completed and returned to HMRC. The certificate allows for three responses, either that additional disclosure on the tax liability is required and that the sums need to be paid or that all is in order and so no further information is needed. If the individual who receives the letter is not a UK tax resident, they can state this and so should not be liable. But, before taking any action, you should make sure the letter is genuine, asking a tax specialist if necessary. Scams constantly evolve using HMRC, often involving ‘phishing’ or spoof phone calls, but overall, the possibility of fraud should not be discounted – [1]GOV.UK “Check if Letter is Genuine.

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What is the Purpose of HMRC’s Nudge Letters?

Nudge letters act as a warning and to remind you that additional disclosure and payment may be needed. However, remember that you may be one of many recipients and further investigation may not be carried out. From HMRC’s point of view, a generated letter is far cheaper than a costly probe on an individual company. In some cases, it will be clear that HMRC is incorrect and so you will be able to advise on this.

Why Have I Received a Nudge Letter?

These letters aren’t circulars and there will be a reason why you’re a recipient. HMRC uses sophisticated technology to pick up on cases where it believes there could be a shortfall on what tax has been paid or an anomaly in terms of information provided. But, it could be the matter is easily rectified – so this could be if your tax return was simply completed incorrectly and accurate information can be re-submitted.

What are HMRC’s Nudge Letters About?

They cover numerous topics and may relate to a particular campaign, while new subjects may be introduced according to where the authority wants to raise awareness. These are some of the issues that could be the subject of the nudge letter: 

  • Overseas assets 

Taxpayers must be aware of whether their affairs are up to date with regard to overseas assets, income, or gains. It could be HMRC now has knowledge of an overseas bank account where you hold funds or perhaps part of your business is conducted abroad – [2]GOV.UK “Tax on Offshore Assets.  HMRC is committed to closing offshore loopholes where it sees tax evasion occurring.  

  • Benefit in Kind tax queries

A Benefit in Kind relates to an item that has a cash value but cannot be converted into cash, such as a company car. HMRC may want to know about declarations such as a potential difference between what was provided by employers and those stated on an individual’s tax return.

  • General pay and tax queries

These again relate to where the pay and tax details received by HMRC from employers do not match those submitted on an  individual’s tax return 

  • Pandemic-related abuses

Employers may be contacted if it is believed they have wrongly claimed under the furlough scheme or if they need to repay some of this.

  • Capital Gains Tax:

This is where HMRC may believe there is a need to pay – or pay more – capital gains tax. This could relate to residential property or other assets.

  • Deferred Consideration 

This concern proceeds from the sale of an asset, such as shares of an unlisted company,  that may be payable in the future, rather than at the time of the disposal – sometimes referred to as an earn-out.  

  • Investment Income

A letter may be sent if HMRC believes that income from investments has been higher than what was declared via self-assessment. 

  • Let Property

You may be making income from a let property and HMRC will want to know that this is being disclosed and tax paid on profits.

  •  ATED – annual tax on enveloped dwellings

This relates to where a limited company has purchased a residential property worth £500,000 or more from 1 April 2020 not filed an ATED return. 

  • Persons of significant control

This will be sent out often to where directors would identify themselves as such and request that they check no extra taxable income has been overlooked.

How Does HMRC Identify Nudge Letter Recipients?

HMRC has a so-called supercomputer, Connect, that is used to identify errors and to cross-check records and data on forms from vast numbers of sources. Meanwhile, the Common Reporting Standard, which was introduced in 2017, allowed sharing of information around the world. HMRC seeks to identify anomalies from its own data and from many external sources, including global ones.

Is it Essential to Respond to an HMRC Nudge Letter?

There is no mandatory need to reply, but if not, then you may well be storing up trouble for the future. If you do not reply, then HMRC will be in contact again and if its deadline has been missed, then this may lead to higher penalties being charged. HMRC requests that the Certificate of Tax Position is completed, but this again is not a legal requirement. It may be that you choose to send a letter, rather than the Certificate,  outlining your position in detail, particularly if there are more complex circumstances. An expert adviser can provide guidance on how to draft this and the information it should contain.

Contacting HMRC by letter could also be better than simply making a disclosure via the online disclosure facility – 

[3]GOV.UK “Online Disclosure Service. If you simply make, for example, a low payment that is due without explanation, then you may seek further requests for reasons from HMRC. Setting out your position and explaining why there has been underpayment or an error, could be the most effective way of settling the matter, and following this, you can then make any necessary payment.

HMRC should also be supportive of any reasonable request for an extension to its deadline if needed, This could be if you are taking advice and need more time to check your records. 

A Nudge Letter from HMRC will almost certainly be unwelcome, but you should not press the panic button. Instead, give it your undivided attention and be prepared to take guidance on the best way to bring your tax affairs up to date and ensure you move away from HMRC’s spotlight.

References

All Company Debt insolvency content is written by our licensed insolvency practitioners.

The primary sources for this article are listed below, including the relevant laws and Acts which provide their legal basis.

You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy here.

  1. GOV.UK “Check if Letter is Genuine
  2. GOV.UK “Tax on Offshore Assets
  3. GOV.UK “Online Disclosure Service