HMRC nudge letters: what is a nudge letter and how to respond

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, bring their tax positions up to date.

If you’re unsure of what these nudge letters are and what your next steps should be, you’re not alone. Moore Kingston Smith’s tax dispute resolution team is here to help you navigate the hoops that HMRC asks us to jump through, so you can get on a path toward a stress-free financial future.

What are HMRC nudge letters?

Nudge letters are a form of communication sent by the UK tax authority HMRC. These letters are intended to encourage individuals or businesses to comply with tax regulations or take specific actions related to their tax affairs, in an effort to rectify any wrongs that have been committed previously.

The term “nudge” refers to the concept of behavioural economics, where subtle prompts or nudges can influence people’s behaviour without mandating or enforcing it outright. HMRC uses this approach to gently remind taxpayers of their obligations, such as filing tax returns, paying taxes owed, or making amends for falling foul when it comes to their tax affairs.

Nudge letters typically contain information or reminders about deadlines, requirements, or potential discrepancies in the taxpayer’s records. They aim to encourage voluntary compliance and reduce the need for more formal enforcement actions by HMRC, which can be both costly and time-consuming for all involved.

Why does HMRC send nudge letters?

These letters started in 2017, at which time HMRC started to receive information under the Common Reporting Standard – this was 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 started issuing a large number of nudge letters in an attempt to put the onus on the taxpayers to check and do the right thing.

However, since 2020, HMRC has issued a wider range of other additional letters. This newer raft of nudge letters has been issued to individuals, companies, and charities. While some of these letters are forward-looking, most state that HMRC has information that indicates some kind of shortcoming in the UK taxpayer’s position.

Some of these nudge letters relate to:

• 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

Common triggers for receiving a nudge letter

HMRC recently announced that nudge letters were also issued to UK residents named in the Pandora Papers, which was a raft of almost 12 million documents from 14 offshore service providers obtained by the International Consortium of Investigative Journalists in 2021. To learn more about this topic, we’d encourage you to read this 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 UK taxpayers, and to recover underpaid tax without the cost of opening formal inquiries.

You won’t need to have done anything deliberate in order to receive a nudge letter from HMRC. HMRC’s wide range of data sources allows their team to pull data from banking and commercial platforms, so those who are unwittingly breaking the law can also be caught in the net. While you might think that you are innocent, HMRC takes infractions seriously and will be much more appreciative if you are upfront about your financial affairs and don’t attempt to hide anything, especially if they can be easily uncovered.

How to respond to a nudge letter?

Although nudge letters are not the equivalent of a formal inquiry, and there is no legal obligation to respond, they should still be treated seriously, although you shouldn’t allow one of these letters to send you into a fit of worry. They are issued for specific reasons, and while everything may be in order, knowing how to respond to a nudge letter can be very beneficial.

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

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

If you believe something may need to take action in order to stay on the right side of HMRC, you should always consider taking professional advice. By seeking the help of professionals, you can not only better understand the case against you but also establish the right amount of tax you will be liable to pay (taking into account reliefs and exemptions within the legislation). If you need to pay a penalty, a professional will help you ensure that this is appropriate to your infraction, while they will help you make any disclosures in the most appropriate way.

If nothing needs to be corrected, it is still wise to tell HMRC this, as this may help prevent an unnecessary and costly formal inquiry in the future. Often, these letters are triggered by specific actions or lines of interest, and there is often no smoke without fire. This is the best way to give yourself peace of mind and ensure that everything is done to the letter of the law, even if you’re sure that nothing is amiss.

How Moore Kingston Smith can help

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 a member of the Moore Kingston Smith team. If you do need to work on your tax affairs, our specialist tax dispute resolution team has a proven track record and will be able to provide professional advice.