How to respond to HMRC 'nudge' letters

The ‘one to many’ letters, asking taxpayers to confirm their tax affairs are in order, is undoubtedly a more cost-effective way for HMRC to attempt to police compliance compared to the more traditional route of opening a compliance review.

Over the last couple of years we have seen HMRC issue these letters across numerous areas of tax including: Partnership income; offshore income; offshore gains; foreign tax credit relief; crypto assets etc. It seems this month HMRC is once again focussed on crypto assets, warning taxpayers of potential capital gains or income tax which may be owed on undisclosed crypto gains which may result in additional interest and penalties.

For those in receipt of such letters it is understandable that it may cause some concern, with many questioning whether they have done something “wrong” to warrant receiving a letter in the first place. It is important to remember that a “nudge letter” is just that, a nudge from HMRC. It does not carry any weight behind it, there are no statutory obligations which must be adhered to. It is not the start of, or pre-cursor to, an investigation.

Many taxpayers, understandably, feel a sense of obligation to respond, and others feel that perhaps if they don’t respond they are more likely to have an investigation opened. In our experience this is simply not the case. Not responding to a letter does not seem to give rise to any more likelihood of an HMRC investigation.

So what do I do with it?

As accountants and advisers we all give the best advice possible at the time, but ultimately it is our clients who have to make the decision whether they wish to respond or not. We would always advise our clients to treat the nudge letter as a reminder to double check their tax affairs, ensure that how they are operating is correct, all assets that should have been disclosed have been disclosed, and ultimately to satisfy themselves that if HMRC do come knocking then there is nothing to find.

Undertaking this exercise for your clients will certainly help them to make an informed decision, if there are no issues then there is no further action needed. Your client may want to simply ignore the nudge letter, or prefer to confidently respond to that it has been re-reviewed and all is in order. Of course, the situation is less clear-cut if you do become aware of any issues. In this case we would advise that care is taken – a thorough review of all the information, setting out steps with your client on how this may be rectified is preferable to simply responding to HMRC’s letter stating there may be a problem.

The options available may be limited, but they are options nonetheless. It may be that amending the tax return is a solution; or more likely the best course of action may be making a disclosure to HMRC. There are a number ways to do this, an online submission may be the most beneficial depending on the area of tax involved. It is important to set out what the error is, how it occurred, and how it can be rectified going forward. By making a disclosure not only will this help to lower the penalties involved but it also gives you a little more control over the sequence of events.

If the situation is simply left unaddressed and HMRC subsequently open an investigation they will typically seek to apply maximum available penalties and you are operating somewhat on the back-foot, managing your clients expectations alongside navigating HMRC’s requests and deadlines. When dealing with HMRC it always serves best to enter into discussions prepared and knowing what the potential outcomes may be.

You need not go it alone

If you need any help or support with your clients our consultancy team are always available to help. Whether you would like us to assist with making a voluntary disclosure or would simply like a second opinion on your client’s particular tax affairs our team will be happy to help.

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