AT SHIPLEYS TAX we have been seeing a rise in so called “nudge” letters from HMRC enquiring about offshore matters. If you have received this letter, why have you got it? What should you do and not do? In today’s tax note we look at how an innocent letter can turn nasty.
What’s a nudge letter?
Since 2017, HMRC has been sending letters to UK individuals who they have identified as having received income or gains from overseas accounts or investments that they may have to pay UK tax on. These are prompted by information HMRC receives from overseas tax authorities under Automatic Exchange of Information (AEOI) agreements and more recently, as a result of the Common Reporting Standard (CRS).
Why?
HMRC’s aim in sending these letters is to:
- nudge or prompt taxpayers to review their tax returns to check that they are complete and correct;
- encourage those who need to rectify mistakes to make voluntary disclosures to HMRC;
- encourage all recipients to update HMRC on whether their tax position is up to date to enable.
HMRC has been sending letters to UK individuals who they have identified as having received income or gains from overseas accounts or investments that they may have to pay UK tax on…
So what’s in these nudge letters?
Broadly, the July 2020 version of the letter states that HMRC compared the information received under the above information exchange with the individual’s tax record and tax return(s) before sending the letter. It says that HMRC believes that the individual may not have paid the right amount of UK tax. Crucially, the new form includes a “certificate of tax position” form which needs addressing.
Key points:
- The letter is not speculative; HMRC is taking a risk-based approach and only contacting taxpayers where they are unable to reconcile the figures received under information exchange agreements to tax records and tax returns.
- They acknowledge that there may be a reasonable explanation for this but the individual should review their affairs and let HMRC know if they need to correct their tax position.
- They recommend getting professional tax advice if the person is not sure whether they have declared all their overseas income or gains which are taxable in the UK to HMRC.
- They warn recipients that HMRC regularly carries out checks and that if HMRC later finds out that the individual did not tell HMRC everything, HMRC will view this very seriously and could carry out an investigation which could result in significant penalties or prosecution.
- All the letters include a “certificate of tax position” form which HMRC asks the individual to complete and return whether they have additional tax liabilities to disclose or not. We understand that one reason why HMRC uses the “certificate of tax position” is because it helps them minimise the number of “no response” cases they would otherwise need to follow up.
The letter is not speculative; HMRC is taking a risk-based approach and only contacting taxpayers where they are unable to reconcile the figures received under information exchange agreements to tax records and tax returns..
What should you do if you have received one of these letters?
It is important not to panic. But do not ignore the letter altogether either. It is imperative the right course of action is taken to minimise any fall out and not to put the proverbial “foot in it”.
There is official guidance provided on handling these letters – in summary these point out:
- The certificates provided by HMRC should not be completed in most cases, because they are unlimited to time and amounts – i.e. they apply to all tax years and for any size of mistake;
- Instead, letters are an acceptable way to respond to HMRC;
- Care must be taken to check the client’s actual position (i.e. check the facts) as a first step.
- Get specialist professional advice!
Some important points to bear in mind when dealing with nudge letters:
- HMRC does not issue such letters to all taxpayers whose returns may be wrong or have not been submitted – it may instead open an enquiry or a more serious tax investigation.
- Just because HMRC sent a letter does not mean that the person’s tax returns are wrong – there may be an innocent explanation.
- HMRC could open a criminal investigation with a view to prosecution for mistakes involving offshore matters that arise as a result of careless (as well as deliberate) behaviour. Alternatively, the taxpayer may face tax-geared penalties of up to 300% (plus asset-based penalties) due to a combination of Failure to Correct penalties and other penalties for offshore matters/transfers.
HMRC could open a criminal investigation with a view to prosecution for mistakes involving offshore matters that arise as a result of careless (as well as deliberate) behaviour…
The letters also advise using what is known as the “Worldwide Disclosure Facility” to rectify tax mistakes for earlier years. However, this may not be appropriate for some and alternatives are available, including making a voluntary disclosure. Bespoke tax specialist advice is imperative.
If you need help with the above please contact Shipleys Tax’s Investigation Team for further information, or for assistance in dealing with a nudge letter or making a voluntary disclosure on 0114 272 4984 or email info@shipleystax.com.