HMRC continues to carry out its normal compliance activity. However, over the last few years we’ve seen it increasingly shift to alternative tactics to bring in more tax for less staff resource and it is now increasingly turning to the ‘nudge letter’.
What is an HMRC nudge letter?
The nudge letter is issued by HMRC where it has reason to believe that tax has been underpaid. That could be because of information received from an overseas jurisdiction, land registry, a crypto-exchange, Companies House, a whistle-blower, or from any other information it holds. You can see what these letters look like at HMRC’s One to Many letter Cryptoassets project .
HMRC asks recipients of these letters to check their tax affairs and ensure that they have declared the correct amount of income and gains, and if there is no problem, to take no further action. However, by receiving one of these letters it is likely that HMRC has information to suggest an underassessment. If HMRC then decides to open an enquiry and finds something wrong, it is likely to push for harsher penalties, which could be up to 200% of the tax due in the worst case.
Why is HMRC issuing nudge letters?
HMRC uses these nudge letters in campaigns and they often get referred to as ‘one to many’ letters. Two of the most recent campaigns relate to coronavirus support schemes and crypto-assets. However, we’ve also seen them used for land and property transactions (for example where a property was sold and no capital gains tax paid, or rental income that has not been declared), offshore income and gains (on which HMRC is receiving a huge amount of data since agreements to share information cross-border have been implemented), employment related expenses, residence and domicile issues, share-related issues (where HMRC has access to information on Companies House), and many others.
The use of nudge letters for suspected coronavirus support scheme issues is in response to HMRC identifying errors in many claims and is entirely separate from their continued action into more serious cases of fraud. As such, we are seeing these letters sent to those that used the scheme but didn’t get their claim completely right. How far these reviews will affect businesses and individuals that made honest mistakes in calculating their entitlement remains to be seen, but early action on receipt of a letter is sure to help.
Crypto-assets are a relatively recent phenomenon and as such are a significant area of interest for HMRC. HMRC first issued guidance about seven years ago and has been updating this guidance regularly since then, with the latest manual being released in 2021. As part of HMRC getting to grips with crypto, it has obtained huge amounts of information from several large crypto-exchanges. For tax purposes, swapping one crypto-asset for another is generally going to be a capital disposal and therefore could give rise to capital gains tax (or a loss!). Given the amount some crypto-assets have grown in value over the years, the tax and penalties could be significant. If you have any crypto-assets and aren’t sure you’ve reported correctly to HMRC, even in the absence of a nudge letter, we would suggest reviewing the position and seeing if a disclosure to HMRC would be the best course of action.
What to do if you receive a nudge letter?
As with any HMRC correspondence it should be considered carefully and is unlikely to just disappear. These nudge campaigns offer taxpayers the option to get ahead of a formal enquiry and potentially secure a better outcome.
Whether you seek professional advice or not, it is important to check your tax returns and activity in light of HMRC’s letter. It may not always be the case that giving HMRC a whole host of information is the right thing to do, and a tax investigation professional should be able to assist you if you do have anything to disclose to HMRC.
What if HMRC has opened an enquiry into my tax return?
Despite nudge letters growing in popularity with HMRC, the majority of its compliance activity is still the ‘standard’ enquiry. There are strict legal protections about what HMRC can and cannot ask for, protecting taxpayers from the taxman over-reaching. Our experience is that HMRC will often ask for everything that it wants and see what it gets back. For this reason narrowing down the scope of HMRC’s interest can help to focus attention on the issues, potentially saving time and professional fees.
For more information on HMRC’s compliance activity or to find out how we can help you, please fill in our online enquiry form or contact one of our offices directly.