Responding to HMRC’s ‘Nudge’ Letters: A Guide for Taxpayers

HM Revenue and Customs (HMRC) has identified a ‘tax gap’ of £35.8 billion in the 2021-2022 tax year, attributed not just to tax evasion or fraud, but also to honest mistakes or misunderstandings of tax laws. To address this, HMRC has been issuing ‘nudge’ letters as part of their efforts to encourage taxpayers to review and correct their tax returns.

Understanding HMRC’s Campaigns

HMRC’s campaigns began in 2007, offering taxpayers the chance to voluntarily disclose unreported income under favourable terms. While many of these campaigns have concluded, the campaign targeting undeclared income from let property remains active. Taxpayers can still come forward voluntarily to declare any undisclosed income.

The Role of ‘Nudge’ Letters

With advancements in data collection and cross-checking capabilities, HMRC’s computer system, Connect, can now more accurately identify discrepancies in tax affairs. This has led to the issuance of ‘nudge’ letters, aimed at prompting taxpayers to review their tax returns and disclose any unreported gains, income, or profits. These letters are part of a broader strategy to combat avoidance, evasion, and criminal activity.

Key Points About ‘Nudge’ Letters

  • The letters are automatically generated and sent en masse, focusing on specific tax areas like overseas income or property disposals.
  • They don’t specify what might be missing from the tax return but are designed to encourage the taxpayer to review and correct their return if necessary.
  • The responsibility to investigate and act lies with the taxpayer.

Certificate of Tax Position and Response Time

Each letter comes with a Certificate of Tax Position, and the recipient has 30 days to respond. Failure to respond could lead to HMRC initiating a formal investigation, potentially resulting in penalties or criminal prosecution. However, HMRC accepts a response by letter as an alternative to completing the declaration.

Recent Focus on Property Business Incorporation

The latest series of ‘nudge’ letters targets individuals who incorporated their property business in 2017/18, applying incorporation relief for capital gains tax purposes. These letters are specifically sent to those who reported a disposal of property interests but paid no CGT due to incorporation relief. HMRC is concerned that an excessive amount of relief may have been claimed.

What to Do if You Receive a Letter

  • Review your tax returns in the context of the letter.
  • If you find an error, contact HMRC using the provided email address.
  • If your tax return is correct, confirm this with HMRC by email, including a calculation of the relief claimed and details of the consideration received upon incorporation.
  • Be aware of the 30-day response window. Failing to respond could lead to HMRC raising a discovery assessment.

In summary, receiving a ‘nudge’ letter from HMRC is a prompt to ensure your tax affairs are in order. It’s advisable to seek professional advice if you’re uncertain about your tax position or how to respond to such a letter.


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