HMRC nudge letters explained

What is an HMRC nudge letter?

In recent years HMRC has used nudge letters as a way of educating taxpayers and prompting them to check they have correctly reported their income and capital gains. Some of these campaigns are purely educational, whereas others are directed at taxpayers where HMRC believe there may be a discrepancy. In addition, HMRC has increased its focus on offshore tax compliance, using nudge letters to write to individuals whose overseas accounts, investments or assets may give rise to income or gains that should be reported in the UK.

HMRC uses a wide variety of sources to gather data, including information exchange systems in place with other countries. The Common Reporting Standard provides a global framework for the automatic exchange of financial account information between tax authorities around the world and enables sharing of vast amounts of information. Banks, investment managers, brokers, certain insurers and other financial institutions in over 100 participating jurisdictions collect data on account holders, which is then automatically exchanged with HMRC where the individual is UK resident.

Information exchanged can include account details, balances, and income received.

As a result of the large amount of data gathering tools and information at HMRC’s disposal, we are seeing an increased number of taxpayers receiving ‘nudge’ letters regarding their offshore financial affairs. Nudge letters are part of HMRC’s one to many approach, in which a group of taxpayers are targeted with a letter prompting them to review or improve their tax compliance affairs.

HMRC is clear that the letters are not part of a compliance check, but rather are designed to encourage voluntary correction of any errors or omissions.

Receiving a letter does not necessarily mean that there are items requiring correction in a taxpayer’s affairs and HMRC acknowledges that there may be a reasonable explanation for discrepancies between the individual’s tax record and information received via an exchange of information.

However, if a letter is received this shouldn’t be ignored.

How to respond to HMRC nudge letter?

Read the letter carefully to determine what response (if any) HMRC is expecting. You should also consider your tax affairs and determine whether you have missed reporting anything to HMRC. If in doubt on whether you need to report any income received from overseas jurisdictions then seek professional advice, as this is a complex area of tax.

If the letter does not specifically ask for a response, you do not need to send one or communicate further with HMRC.

As part of the communication, HMRC may ask you to sign a certificate of tax position to confirm that your tax affairs are up to date. Careful consideration should be given prior to signing and returning this certificate, even if your tax position is fully correct. The wording of the certificate is sometimes such that it covers all tax years rather than one specific year, and should HMRC discover any inaccuracies, consequences could be severe and could include prosecution.

Taxpayers should also note that there is no legal requirement to sign and return the certificate.

If you are confident that your offshore affairs are up to date and no tax is owed to HMRC, it is acceptable to respond with a letter confirming this. HMRC has advised that it will follow up in cases where no response is received at all, which is likely to take the form of an additional letter. Continued lack of response may eventually prompt HMRC to open a formal enquiry into your tax position.

If you discover that there is an error or an inaccuracy in your affairs, this must be disclosed to HMRC. The nature of the inaccuracy and your particular circumstances will determine the best route for disclosure to HMRC.

Customer Compliance Manager (CCM)

As well as the nudge letters detailed above, HMRC has also been writing to taxpayers introducing a Customer Compliance Manager (CCM) and requesting a meeting to further understand the taxpayer’s affairs. Fostering a good relationship with HMRC is in the taxpayer’s best interests, although there is no obligation to meet with the CCM. Taxpayers may find it useful to have a dedicated contact in the CCM, with HMRC stating that in return for transparency, the taxpayer can expect a more joined-up and direct service from HMRC.

There has been press around these letters recently describing them as HMRC’s attempt to keep track of billionaires; however the letters are likely being sent to a much broader spectrum of taxpayers who fall into HMRC’s ‘Wealthy’ section, but focussing on those with complex tax affairs.

How can Saffery help you

If you receive an HMRC offshore nudge letter, it is important not to ignore it. We can help you understand what HMRC is asking, review your offshore income, gains and assets, assess whether any action is required, and prepare an appropriate response. Where errors are identified, we can also support you in making a disclosure to HMRC and managing the process efficiently.