Hidden economy – HMRC nudge letters

HMRC has announced that they are writing to individuals they suspect of being part of the hidden economy and not declaring income/gains from online marketplace sales up to the tax year ending 5 April 2023.

The ‘nudge/one to many’ letters are designed to encourage the recipient to check their tax affairs and, where necessary, register for the digital disclosure service (DDS) to bring their tax affairs up to date and report any unpaid tax, interest and the appropriate penalty.

HMRC has gathered data from digital platforms that sell goods or services online, such as Vinted and eBay, etc. The information is filtered so that the more serious cases are investigated by an HMRC officer. Cases where it is unclear whether tax is owed are selected for a nudge letter.

How do you disclose unpaid tax?

The DDS enables individuals to make a voluntary disclosure to bring their tax affairs up to date and report any unpaid tax.

You can either call HMRC to register or apply online for the DDS. You are then sent a payment reference number so that you can pay the tax, interest and penalty when you make the disclosure. HMRC automatically allows participants 90 days to make the disclosure and pay. People that require longer to pay should still submit their disclosure within the 90 days and then ask HMRC for time to pay the tax. In some cases, HMRC also allows participants more time to make the disclosure.

HMRC asks that people use the DDS rather than write to them, as they have a dedicated team to deal with the disclosures. This means that the matter can be resolved a lot quicker and more efficiently. Anyone who has sold items via a digital selling platform can use the DDS.

A tax agent can register you for the DDS and deal with the disclosure process on your behalf.

What should you do?

If you have received a nudge letter from HMRC, you must respond even if you believe that your tax affairs are up to date. HMRC makes it clear that anyone who ignores the letter will face a compliance check or investigation to check whether their affairs are in order.

It is sensible to seek professional tax advice to check your position before you respond to HMRC due to the complexities of the UK tax code and the relevant time limits and allowances that may apply. Consider the reason the items were sold on the digital platform and the amounts received.

While taxpayers can benefit from a general trading allowance of £1,000, if the income exceeds this figure, the individual should file a return. If personal items worth more than £6,000 are sold or disposed of, the proceeds may be subject to capital gains tax. If there is missing information, it may be possible to estimate the expenditure so that the correct amount of tax is paid. Professional advisers can also advise you on any other allowable deductions that can be offset against the trading income or capital gain.

A common question is how far back HMRC can go to recover unpaid tax. This depends on the reason why the tax was not paid on time and whether the asset or property is in the UK or overseas. The UK tax code is very complex and the time limits that apply depend on the type of behaviour, the property’s location and whether tax returns were filed in the years in question.

In summary, there are three types of behaviour: genuine mistakes; a failure to take reasonable care or; deliberately not declaring the income. In some cases, HMRC can go back up to 20 years to recover the tax owed. The type of behaviour also affects whether there is a penalty to pay on the tax paid late.

To ensure that the penalty is kept to a minimum, it is critical to fully cooperate with HMRC because, in the most serious cases, the penalty can be up to 200% of the tax owed where the assets are held or transferred overseas.

How can Moore Kingston Smith help?

We specialise in helping individuals bring their tax affairs up to date and have a proven track record of successfully representing clients wishing to make a voluntary disclosure to HMRC. We can assist with all aspects of the disclosure and communicate with HMRC on your behalf. We will ensure that the tax owed is kept to a minimum, as well as minimise any penalty that may be due on the tax paid late.

We know how to get this right first time to minimise the risk of HMRC asking further questions. We understand how disruptive this can be and work with you to ensure that the best route is taken to resolve the issue as quickly as possible.

For further information on how we can assist, please either complete the inquiry form or call John Hood on 020 4582 1440 for a confidential discussion about how we can help.