Have you received a nudge letter from HMRC? Here is what you need to know

What are nudge letters?

HMRC is now regularly issuing “nudge” letters (or “one-to-many letters”) to encourage taxpayers to review their tax affairs, identify whether there are any shortcomings, and if necessary to bring their tax positions up to date.

These letters started in 2017, after HMRC started to receive information under the Common Reporting Standard in respect of overseas bank accounts held by UK residents. HMRC did not have the resources to investigate all possible cases of undeclared income or gains, so instead issued significant numbers of nudge letters in an attempt to put the onus on the taxpayers to check their own positions.

Since 2020, HMRC has issued a wide range of other nudge letters. These have been issued to individuals, companies, and charities, and while some of these letters are forward-looking, most state that HMRC has information which indicates some kind of shortcoming in the taxpayer’s position. Some of the topics covered have included:

• Income from short-term property letting
• Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) claims
• Cryptoasset transactions
• Research and development claims
• Earnings from online market places

HMRC has also recently announced that nudge letters are being issued to UK residents named in the Pandora Papers (almost 12 million documents from 14 offshore service providers obtained by the International Consortium of Investigative Journalists in 2021), in relation to which we recently published a separate article.

HMRC has access to more information than ever before and is increasingly comparing different sources of information to identify groups of taxpayers who pose particular risks. Nudge letters are increasingly seen as a very cost-effective way of allowing HMRC to target large numbers of taxpayers, and to recover underpaid tax without the cost of opening formal enquiries.

What to do if you receive a nudge letter

Although nudge letters are not the equivalent of a formal HMRC enquiry, and there is no legal obligation to respond, they should be taken seriously. They are issued for specific reasons, and while everything may be in order it is certainly worth examining carefully whether or not this is the case.

If a taxpayer does need to correct their position, there are a number of ways in which they might do so, including:

• Registering with HMRC and submitting tax returns for the first time
• Amending tax returns submitted previously
• Making a disclosure to HMRC outside the tax return process

If you believe something may need correcting you should always consider taking professional advice, not only to determine definitively whether this is the case, but also to establish the right amount of tax at stake (taking into account reliefs and exemptions within the legislation), to consider the possible penalty position, and to ensure that any corrections or disclosures are made in the most appropriate way.

If nothing needs to be corrected, the best approach may still be to tell HMRC this, as this may head off an unnecessary and costly enquiry in the future.

Taking nudge letters seriously can save time and money in the long run, so if you have received a nudge letter, please do not hesitate to contact us. If you do need to regularise your tax affairs, our specialist tax dispute resolution team has a proven track record and will be able to assist you in doing so.