Beware of the HMRC "nudge" letters

By Liz Beadsley, Chartered Tax Advisor at Irwin Mitchell

With the continuing move towards global transparency, certainly in the field of international information exchange agreements (whether via FATCA, CRS or other reciprocal agreements), it is clear that HMRC receives more information about tax payers and their worldwide assets than ever before.

In the last couple of weeks HMRC have announced a plethora of ‘One to Many’ letters that they are going to be sending out. It is clear from this that they consider their nudge letter approach to be a cost effective way of collecting otherwise undeclared tax.

The main letter we have seen has been sent to those who are not domiciled in the UK but, under the changes introduced in 2017, are now deemed UK-domiciled for all tax purposes asking them to check that their returns have correctly declared all their worldwide income and incomes since the change.

Other topics for these letters include:

• Statutory residence test: to be sent to taxpayers in advance of finalising their 2019/20 tax returns where there is a risk they may incorrectly believe they are not UK resident.
• Benefits in kind: asking the taxpayer to review potential discrepancies between the figures provided by the employer to HMRC for benefits in kind (on form P11D) and those declared on the employees tax return
• Investment income from financial institutions:  where HMRC believes that the information on a taxpayer’s tax return does not match the information on accounts supplied to them by the banks and other financial institutions a letter will be sent setting out the information that HMRC has received
• CGT on property disposals: this is a follow up to exercises in previous years where a letter is sent to people that HMRC believe have disposed of a property that was not their main home but have not included the disposal on their 2018/19 tax return.
• Residential property capital gains:  this letter is being sent to individuals disposing of residential property but declaring it as ‘other properties, assets and gains’ rather than ‘residential property’ and therefore not paying the correct rate of capital gains tax.
• Pay and tax discrepancies: where HMRC has identified that pay and tax included on a tax return does not match the information supplied by the employer(s) a letter is being sent to ask the taxpayer to check the return and correct any errors.
• Person of significant control (PSC): which broadly is a shareholder in a mid-sized business holding more than 25% of the shares or voting rights, has the right to employ or remove most of the board of directors and has significant influence or control in a company. This is an educational letter to highlight some common errors and ask them either to amend their return if necessary, or consider whether they should be completing one if they do not already do so.

All the situations covered in these letters are good examples of HMRC using their powerful Connect computer and data management systems to highlight risk areas for taxpayers where tax returns may not match HMRC records, and targeting their approaches. This clearly pays off and it is likely that as the data management systems develop, HMRC will continue to challenge taxpayers about the accuracy of their UK tax returns via their nudge letters.

On the CGT on property disposals letter, 15% of those in receipt of letters last year relating to the 2017/18 tax return amended their tax returns. This will then have left HMRC with a smaller number of taxpayers to approach individually where they have clear evidence the return is incorrect.

A recipient of a nudge letter should check and review their tax position carefully and take legal advice at the earliest opportunity. The tax rules are constantly evolving and as personal circumstances change, it could be that even for those who have received professional advice in the past, that advice may now be out of date.

In the last couple of weeks HMRC have announced a plethora of ‘One to Many’ letters that they are going to be sending out. It is clear from this that they consider their nudge letter approach to be a cost effective way of collecting otherwise undeclared tax....”