HMRC Nudge Letters – what you need to know

What are HMRC nudge letters?

HMRC sends out so-called ‘nudge’ letters to individuals or businesses after it receives data which causes it to think that the taxpayer may not have disclosed some income, profits or gains in their tax returns for one or more tax year. It is to encourage taxpayers to set their tax affairs in order. The focus of these nudge letters changes, and HMRC tend to bulk issue nudge letters to groups of taxpayers or agents at the same time.

Nudge letters are designed to prompt you to make sure your tax returns are correct and up to date, without launching an official investigation. If HMRC does not receive a satisfactory response, then it will consider opening an enquiry.

There are three types of nudge letters which are summarised below, together with some guidelines for dealing with them (particularly when they arrive with certificates for completion):
 

Educational nudge letters

These are designed to prompt a taxpayer to consider if they need to get tax advice or take more care over an aspect of their tax returns which they will submit in future or for which the deadline to amend the return is yet to expire. Not all of these will request a reply.
 

Nudge letters based on information received by HMRC

Most nudge letters are issued because HMRC has received information which suggests the taxpayer’s tax return(s) for a past tax/accounting period are incorrect. They are designed to encourage the taxpayer to check their returns, get professional advice if needed and amend their position (if necessary) either by submitting an amended return (if they are in time to do so) or by making a formal disclosure to HMRC.
 

Nudge letters with certificates of tax position 

HMRC sometime issues letters accompanied by ‘Certificates of Tax Position’. Examples of these are the ones HMRC issues when it receives data from overseas tax authorities under the Common Reporting Standard or other international information exchange agreements. Care must be taken to check the filing position and then a response should be sent in a suitable format to HMRC. The Chartered Institute of Taxation (CIOT) guidance to tax advisers makes clear that the certificates provided by HMRC should NOT be completed in most cases.
 

What to do if you get an HMRC nudge letter

If you have received a nudge letter from HMRC, the best thing you can do is contact a tax disputes professional.

You may have been offered a disclosure process in the letter from HMRC already, but it is important to understand the process and the other disclosure options you can use to get your affairs up to date. There may be more suitable options for your situation, particularly if the matter relates to offshore accounts, or if you think there may be more errors in your past tax returns. There are several disclosure options such as:

Recent HMRC Nudge Letters

In this nudge letter campaign HMRC is urging PE firms to review their VAT compliance procedures and performance against the best practice guidance HMRC set out in 2016. That primarily focuses on how the PE structure functions and HMRC’s views on partial exemption VAT recovery. Several key risks for the sector are highlighted in the guidance, including:

  • Fair and reasonable attribution of input tax to supplies with a right to deduct under the partial exemption method
  • Verification of genuine supplies of management services to investment companies
  • Usage of taxed inputs
  • Right to deduct input tax on the disposal of shares at the exit of the investment
  • Application of reverse charges
  • Determination of whether supplies are made in the UK for VAT purposes.

Where businesses now establish that there have been shortcomings in their VAT compliance, the nudge letter reminds firms of their obligations to rectify any errors and bring their VAT affairs up to date.

HMRC is especially concerned about PE businesses evaluating the current partial exemption methodology they use for VAT recovery and determining whether it remains appropriate. This can be a complex area and if your firm has not followed established HMRC practice it is important to have a strong case to support the methodology you have used – HMRC may well challenge it on any subsequent VAT inspection.

HMRC receives reports from cryptoasset digital platforms detailing the transactions of those buying and selling crypto currencies and other cryptoassets. This will become an automatic system from 2027, but HMRC already knows about some transactions even if they are not included on investor’s tax returns.  

Unsurprisingly, HMRC uses this crypto transaction data to check that any gains or profits are declared properly on investor’s tax returns. If the data does not tie up, it may issue a nudge letter to encourage the taxpayer to put things right using a ‘disclosure facility’ before taking more drastic action.  

Common tax mistakes with cryptos 

Most crypto asset investors realise that there will be tax to pay when they make a profit on them, but a common problem arises in spotting the point at which a “disposal” has been made – it is not just when any profit hits your sterling, dollar or Euro bank account.  

For example, let’s consider Lesley who invested £25,000 in Bitcoin a few years ago. The value of Lesley’s holding has nearly trebled, but she has held onto half of the Bitcoins using the rest to pay for a ‘one in a lifetime holiday’ and to invest in Ether to spread her risk. Both these transactions were ‘disposals’ on which a capital gain needs to be calculated (using the Bitcoin to sterling rate on the date of the transaction) and should have been reported on Lesley’s tax return. 

How to disclose any crypto tax mistakes 

Last year HMRC created a ‘Cryptoasset Disclosure Facility’ specifically for crypto owners to use to make tax disclosures and the nudge letters encourage recipients to use it. But this may not be the best way to put things right. Unlike the cryptoasset disclosure facility, the WDF and DDS have the benefit of enabling you to notify HMRC of your intent to disclose. Then you have 90 days to submit the disclosure and pay your outstanding liabilities (or request time to pay). These other routes may also be better if there are other tax irregularities that need to be reported – HMRC will take a very dim view if you put right cryptoasset tax errors but do not address other errors at the same time.  

Make sure you seek specialist advice before approaching HMRC.

HMRC sent a batch of nudge letters to wealthy individuals. Those on the target list are people earning over £200,000 a year, who are either: 

  • Not registered for self-assessment, or 
  • Who failed to submit a 2021/22 tax return despite being issued with a notice to file. 

Risk for recipients 

Individuals who are not registered for self-assessment when they should be face significant tax-geared ‘failure to notify’ penalties. The penalty is based on the amount of tax that should have been included on the tax return if the notification had been made and a return filed. This is the case even if the tax cannot be assessed, as it is based on the amount to which the person was liable.  

Individuals who have not yet submitted their 2021/22 tax return will face significant tax-geared 12-month late filing penalties. Remember that where a return is more than 12 months late the penalty charge is the greater of:

  • £300, or 
  • 5% of the tax liability, or 
  • 70% of the tax liability (where the withholding of the information is deliberate), or 
  • 100% of the tax liability (where the withholding of the information is deliberate & concealed). 

The 12-month late filing penalties are particularly concerning following the Upper Tribunal’s decision in Harrison v HMRC [2022] UKUT 216 (TCC), because in many cases the person will face a penalty for deliberately withholding information by consciously not filing their return. This may expose them to other sanctions such as having their details published publicly by HMRC as a deliberate defaulter.   

Putting things right 

Despite HMRC’s focus being on filing returns, actually submitting the missing tax return(s) may not be the most appropriate way to deal with these omissions. In many cases, particularly if you need to file for more than one year or correct other tax mistakes, a voluntary disclosure is a much better way to approach HMRC.  

There are different ways to do this, depending on whether you need to obtain protection from criminal prosecution.  Make sure you take advice from a professional who has experience in dealing with HMRC enquiries.

HMRC is continuing to focus on taxpayers who have not paid the right amount of tax through the use of Electronic Sales Suppression (ESS). ESS till systems seek to manipulate takings to reduce a business’ tax bill. Although sales are put through the till as normal, the ESS system can for example delete sales and route card payments through offshore banks. 

As part of this focus, in June 2024 HMRC issued a further round of nudge letters to taxpayers asking them to consider whether their historic tax position is correct. If you received one of these letters, it should be taken seriously, and you should seek advice if you have any doubt as to the validity of historic filings or the need to file returns not previously submitted.  

A specific disclosure facility was opened by HMRC in December 2022 for businesses who needed to disclose the use of ESS. This is still available, and it is expected that any HMRC nudge letter campaign will point taxpayers to this facility to disclose any irregularities. However, this disclosure facility is just one option available - there are other routes that could be more appropriate depending on the specific facts and circumstances. In particular, the contractual disclosure facility or 'Code of Practice 9' route which can offer immunity from prosecution for tax offences in exchange for a full disclosure of all mistakes. We would certainly advise seeking appropriate specialist advice. 

If a taxpayer knows about the use of ESS systems in their business, they should be actively seeking to approach HMRC to regularise their affairs before waiting for a letter to land from HMRC. HMRC will want the unpaid tax, late payment interest and penalties paid, but it may be possible to arrange payment by instalments if needed. The key benefit to voluntarily disclosing irregularities is that it may mitigate the ultimate financial cost of settling historic matters through lower tax-geared penalties.

Have you received a nudge letter from HMRC?

Book an online appointment

Get support now