HMRC prepares for new nudge campaigns

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HMRC has recently announced two new nudge letter campaigns, targeting Offshore companies owning UK property and Individuals who have disposed of shares in unlisted UK companies. But how quickly do you need to act if you receive a nudge letter?

Designed to prompt a response from the taxpayer, HMRC have been using nudge letters for the past 5 years as a cost-efficient way of reducing the tax risk.

Nudge letters are targeted to areas HMRC consider to be a particular risk. They are sent to taxpayers based on the information HMRC have received from third parties and information in the tax returns. Nudge letters place the onus on the taxpayer to check their tax position and if necessary, make the appropriate disclosure to HMRC, allowing HMRC to close the tax gap with less cost and enabling them to focus their formal enquiry powers on more serious errors.

Offshore company owning UK property

HMRC is reviewing data, including from the Land Registry, targeting offshore corporates owning UK property who may not have met all their UK tax obligations.

These companies will receive one of two letters, accompanied by a “certificate of tax position”. These certificates typically require a declaration of the recipients’ offshore tax position, typically within 30 days.

HMRC is planning on sending two different nudge letters:

  • One to non-resident companies that own UK property and may need to disclose income received as a non-resident landlord or a liability to the Annual Tax on Enveloped Dwellings (ATED). The letter will also recommend that any connected UK resident individual re-examine their personal tax position, to see if they are within scope of relevant UK anti-avoidance rules.
  • One to non-resident companies that appear to have made a disposal of UK residential property between 6 April 2015 and 5 April 2019, without filing a Non-Resident Capital Gains Tax return. Where the company purchased the property before 5 April 2015 the whole of any overall gain is not charged to Non-Resident Capital Gains tax; however, that part of any gain not charged may be attributable to the participants in the company. Such corporates may also be liable to pay UK tax on rental profits, as well as income tax under the transaction in land rules and ATED.

Even though the letters will be addressed to a corporate entity, HMRC are recommending connected UK resident individuals review their personal tax affairs. We would recommend that any UK resident participating in an offshore company owning UK property seeks professional advice to ensure their affairs are up to date.

Share disposals

HMRC are sending nudge letters to people recorded as being “Persons of Significant Control” in unquoted companies at Companies House. A person is a Person of Significant Control if they hold:

  • More than 25% of the share in a company
  • More than 25% of voting rights in the company
  • The right to appoint or remove the majority of the board of directors.

The letters are being sent to individuals who have disposed of some/all of their shareholding in the 2020/21 tax year but not recorded a disposal on their tax return for the year.

Individuals who receive a letter are advised to check the position and amend their tax return by 31 January 2023. If the letter is ignored, it may result in HMRC launching a formal enquiry.

What to do if you receive a nudge letter

Whilst there may be a good reason for the discrepancy or a genuine explanation, if you receive a nudge letter it is important to review your position and tax returns in the light of HMRC’s letter. Unfortunately, as with any HMRC correspondence, it is unlikely to go away on its own and ignoring the letter may result in a formal enquiry.

Taxpayers should carefully consider their position and if irregularities are discovered, the best way to regularise the position.

We would not advise completing any certificates before taking professional advice. A certificate will include a statement that the taxpayer understands that a false certificate is a criminal offence and could result in an investigate or prosecution. As such, it can often be best to reply to HMRC by letter, or other disclosure method.

If it emerges that the position needs regularising, early and open communication with HMRC will minimise the risk of the situation escalating with HMRC and penalties being imposed.

Please contact Stephen Kenny, Partner in our Personal Tax team if you have any queries in relation to this article.