Nudging taxpayers towards compliance

Tax Talk - April 2022

read timeRead time: 4 mins

HMRC is making greater use of ‘nudge letters’ to prompt taxpayers to check whether their UK tax affairs are in order and to encourage self-correction. If you receive one, think carefully about how to respond and, if in doubt, contact us.

HMRC has a wide range of powers and strategies to enforce tax compliance and pursue whatever tax it believes is owed. Traditionally, these measures have ranged from informal enquiries and routine compliance checks through to criminal investigations. 

In recent years HMRC has increasingly used non-statutory letters, usually prompted by information received, to encourage taxpayers to disclose undeclared income or gains and omissions from tax returns – ‘nudging’ them towards compliance.

Why more nudge letters?

Some nudge letters are educational, issued to remind taxpayers of reporting obligations and how tax liabilities can arise. These have included campaigns focussed on taxpayers who are not UK domiciled or who invest in crypto assets – where tax legislation is complex and tax treatments are uncertain.

But information sharing across tax jurisdictions is also playing its part.

The adoption of the Common Reporting Standard and the UK’s signing of Tax Information Exchange Agreements means HMRC receives millions of items of data from other jurisdictions. This is analysed by HMRC’s Connect super-computer system to identify apparent inconsistencies across a wide range of tax areas.

Rather than checking potential discrepancies against tax returns, HMRC issues nudge letters to taxpayers who may or may not have made a mistake or omission. This approach is cost effective for HMRC and passes the burden of investigating a taxpayer’s affairs to the taxpayer.

Who is HMRC targeting?

Taxpayers likely to be contacted include individuals with a non-UK aspect to their tax affairs – such as non-UK domiciliaries who have claimed the remittance basis or long-term UK residents who are deemed domiciled in the UK. But any taxpayers where HMRC’s data analysis identifies discrepancies are going to be in the spotlight.

What should I do if I receive a nudge letter?

Receiving a nudge letter does not necessarily mean you have submitted an incorrect tax return or underpaid tax, but it may do.

If HMRC does not receive a response to their nudge letter they are likely to continue to chase for a reply and may issue a formal enquiry notice. If you do not respond to a nudge letter and your tax return is incorrect, you are likely to be charged increased penalties.

You should review your situation carefully and establish whether there is an inaccuracy on your tax return or if a source of income or gains has not been disclosed. If in doubt, speak to the PKF Personal Tax team who understand nudge letters and are experienced in dealing with HMRC disclosures.

There are different ways to respond to HMRC, not all of which are stated in the nudge letter, and we will help you to correct any errors and advise how best to regularise your position. One option could be to submit a disclosure using HMRC’s Worldwide Disclosure Facility.

Working with an adviser also demonstrates to HMRC you are taking your position seriously and can help mitigate tax and penalties. This is particularly important if a disclosure concerns offshore income or gains as these have been the subject of numerous HMRC campaigns in recent years. Furthermore, an enhanced penalty regime and extended time limits for HMRC to assess these tax liabilities have been introduced.

Certificates of tax position’ – beware

A nudge letter is often accompanied by a ‘Certificate of tax position to be completed and returned to HMRC’ with the relevant box ticked certifying the taxpayer:

  • will declare all their outstanding UK tax
  • has declared all their income and/or gains correctly on their tax returns
  • has not declared their income and/or gains as they are covered by personal allowances or reliefs
  • has not declared their income and/or gains as they are not liable to UK tax
  • The certificate includes a declaration by the taxpayer confirming their understanding that a false statement can be a criminal offence and result in investigation and prosecution, yet the statement applies to all tax years and sizes of mistakes.

As a nudge letter is not a statutory letter, you are under no legal obligation to sign the certificate, but this is not made clear in HMRC’s letter.
It is important to take care when deciding how to respond to the nudge letter and, if in doubt, take advice from the PKF Personal Tax team at an early stage.

Written by Jonathan Collins in our London office.