HMRC nudge letters – an update

11 August 2020

HMRC has just begun issuing another batch of ‘nudge’ letters to taxpayers after processing data received from overseas tax authorities under the Common Reporting Standard. View our interactive map to see the full reach of the Common Reporting Standard.

Receiving a nudge letter does not necessarily mean a previously submitted tax return is incorrect. There may be an innocent explanation or indeed in cases we have seen, there had already been full and complete disclosure. The purpose of the nudge letter is to prompt or nudge the taxpayer into reviewing their tax returns and finances and checking whether further income, gains or profits need to be notified to HMRC. 

HMRC receives millions of pieces of data annually through CRS. Data is checked against individual tax returns before the nudge letters are sent, using HMRC’s Connect super-computer system. Using nudge letters, is a cost-effective way for HMRC to follow up on the enormous volume of CRS data it receives. Of course, it does place the onus on the taxpayer to undertake the review work but most of the UK’s tax rules already follow the ‘self-assessment’ principle.

When dealing with these letters it is important to remember that HMRC does not necessarily issue nudge letters to all taxpayers whose returns may be wrong or not submitted at all. It could always opt to simply open an enquiry or a more serious tax investigation instead.

The nudge letters are a prompt based on specific data – telling HMRC about additional income or gains after receiving a nudge letter will likely be regarded by HMRC as a ‘prompted’ i.e. non-voluntary disclosure so any penalties due could be higher than if the disclosure was purely voluntary and was made before the nudge letter was sent. For example, for a Failure to Correct penalty (that under the Requirement to Correct rules can only apply for tax years up to and including 2015/16), the minimum tax geared penalty would be 150% instead of 100%.  No FTC penalty will apply where the taxpayer has a ‘reasonable excuse’ to explain the failure to disclose the additional income or gains. However other penalties may still apply. If HMRC receives no response at all to the nudge letter then it is likely to follow up in another way e.g. by starting an enquiry or investigation.

HMRC asks recipients of the letter to complete a certificate of their tax position. Completing the certificate includes the client confirming their understanding that a false certificate is a criminal offence and can result in an investigation or prosecution. Because the certificate is unlimited to time and amounts (i.e. it applies to all tax years and for any size of mistake) it is likely to be advisable to respond via an explanatory letter or, if a disclosure is needed, by approaching HMRC to start that process first. Specialist advice should be sought on the most appropriate disclosure method depending on the client’s circumstances.

Occasionally a client will simply forget to report investment income and gains from an offshore bank account on their tax return but more commonly, disclosures are far more likely to arise from less straight forward areas such as inadvertent remittances from offshore bank accounts, income from reporting or non-reporting offshore investment funds and income from unintentional UK situs investments.

If any of your clients receive a nudge letter from HMRC, a compliance review should be encouraged before responding to the letter as appropriate. Of course, a compliance review, if not recently undertaken, is probably a good idea anyway. This can identify if a disclosure is needed and facilitate an approach to HMRC before a nudge letter is received.

A copy of the template that HMRC is using for this batch of nudge letters can be viewed on the CIOT website.