HMRC’s ‘nudge letters’ are specifically worded letters to prompt a response from the recipient. In a previous article, we outlined what you need to know about nudge letters issued by HMRC in respect of the significant amount of overseas bank account information for UK residents that it receives under the OECD’s Common Reporting Standard. These nudge letters continue to be issued and will inevitable be for some time to come, but we are now starting to see HMRC extending the use of nudge letters to other taxpayer groups.
Richard Morley outlines the latest developments concerning nudge letters and what taxpayers need to be thinking about.
Euro Pacific Bank
The most recent batch of nudge letters were issued by HMRC as part of an investigation into UK taxpayers with connections to Euro Pacific Bank, which is based in Puerto Rico. The bank suspended its operations on 30 June 2022 after the Puerto Rican authorities issued a cease and desist order. Interestingly, Puerto Rico is not part of the OECD’s common reporting standard and HMRC received the information as part of a global investigation by the Joint Chiefs of Global Tax Enforcement (the J5) following suspicions of tax evasion and money laundering.
HMRC issued furlough fraud nudge letters to a significant number of employers saying they may have to repay sums they have claimed under the Coronavirus Job Retention Scheme or CJRS for their furloughed employees. HMRC were asking that the employers reply to the nudge letter whether or not they think they have overclaimed CJRS payments. Employers who overclaimed furlough payments whether through innocent error or furlough fraud were encouraged to contact HMRC and arrange to repay CJRS payments.
Companies working on innovative projects in science and technology may be able to claim Corporation Tax relief if their work meets the Government’s definition of Research and Development (R&D). Nudge letters received from HMRC urge claimants to clarify whether their activity actually qualifies for tax relief, drawing attention to the BEIS definition of R&D which is much stricter than the commercial or engineering definition. In practice, compliance checks can uncover claims that don’t fall within the BEIS criteria, triggering HMRC to send out nudge letters.
Rollover relief claims on residential letting sales
HMRC have issued nudge letters to taxpayers who claimed rollover relief under s.152 TCGA 1992 for residential rental properties. The relief can only be claimed for residential properties in very limited circumstances, and those contacted will have claimed the relief on such properties in their 2020/21 tax returns. Letters will be sent out advising taxpayers to check whether their claims were correctly made and given 30 days to respond or amend their tax returns accordingly.
HMRC issued nudge letters to individuals who it believes hold or have held crypto assets, advising them that any gains realised from the sale of crypto assets are subject to Capital Gains Tax. The letters advised the taxpayer to review all of their cryptocurrency transactions and disclose any relevant gains. Common forms of disposals of crypto assets that taxpayers may not realise are subject to Capital Gains Tax include but are not limited to selling crypto assets, exchanging one type of crypto asset for another, and using crypto assets to purchase goods or services. Learn more on the tax implications of disposing of crypto assets here.
HMRC issued ‘nudge’ letters aimed at those taxpayers whose 2020/21 tax return contains discrepancies concerning benefits-in-kind. HMRC receive details of such benefits from employers via P11D forms and they have identified a number of tax returns containing details which do not tally with these P11Ds. Taxpayers in receipt of this letter are advised to check their 2020/21 tax returns and make any relevant corrections.
Offshore corporate owning UK property
HMRC says it has reviewed data from HM Land Registry to identify companies who may need to make disclosures for the non-resident corporate rental income, the annual tax on enveloped dwellings (ATED), the transfer of assets abroad (ToAA) legislation, non-resident capital gains tax and income tax under the transactions in land rules. An alternative letter will be sent to non-resident companies that appear to have made a disposal of UK residential property between 6 April 2015 and 5 April 2019 without filing a non-resident capital gains tax (NRCGT) return.
The instances outlined above demonstrate how HMRC is expanding the reach of nudge letters into new groups of taxpayers. We should expect to see the continued and no doubt further extended use of nudge letters by HMRC in the future. The use of nudge letters is a cost-effective way to check the tax risk involved in a particular area or by a taxpayer group. By approaching the matter of tax risk this way, it places the onus on the taxpayer to undertake the requisite review work instead of HMRC and to make any necessary disclosure as appropriate.
If you receive a nudge letter, this does not necessarily mean a previously submitted tax return is incorrect and there may of course be a genuine explanation for the apparent discrepancy. However, it is good practice to undertake a thorough review of your own tax affairs to determine if a disclosure to HMRC is required and if so, to take appropriate professional advice. Find out more about making a disclosure to HMRC and get in touch with Richard to discuss your specific circumstances.