How should you respond to a ‘nudge letter’ from HMRC?

A recent query was brought to our attention in Taxation Magazine in relation to nudge letters. In the query, the writer comments that HMRC wrote to their client stating that HMRC is aware the client has overseas income. The letter enclosed a certificate requiring the client to confirm the action taken in response to the letter and/or to confirm their tax affairs were up to date. The queries were essentially:

1) does the client need to respond, what right do HMRC have to request this information and is it “reasonably required”?

2) does the certificate need to be completed?

3) can we ask HMRC for information it holds on the taxpayer?

We responded to the query (here) and write a more detailed response below.

Responding to HMRC

On receipt of a nudge letter, we recommend responding to HMRC advising what action has been taken i.e. a thorough review of the client’s affairs and confirmation that no further action is required or confirmation the client is registered to make a disclosure. If HMRC do not receive a response within the month, it is likely the department will open an enquiry and this would be a lot more intrusive and stressful than simply responding.

The query referred to “information reasonably required to check a taxpayer’s tax position”. This phrase refers to formal information requests under Schedule 36, Finance Act 2008. The letter received is a ‘nudge’ letter, designed to encourage taxpayers to review their affairs and make appropriate disclosures. It is not a request for information (and does not reference Sch 36) and thus is not covered by the ‘reasonably required’ safeguard. For more detail on information notices, click here and we cover Financial information notices in this article.

Completing the certificate

HMRC have been sending out ‘nudge letters for a number of years with certificates requiring individuals to confirm their tax position. Last year however, after discussions with tax advisers in practice, HMRChad changed their approach to remove the requirement to sign. Most advisers, London Tax Network included, always advised clients not to sign these certificates as doing so could prejudice the taxpayer’s legal position in future. The certificates confirmed in broad terms that the client had reviewed their tax affairs and considered them to be up to date. There were no time bars on the wording so if HMRC found anything untoward in an individual’s tax affairs in later years, it could suggest there was a deliberate inconsistency and charge deliberate penalties.

The client is not legally required to complete the certificate and not doing so should not prejudice their position. Depending on the wording of the certificate, signing it could have legal implications beyond those anticipated by the taxpayer and we would recommend not signing. Having said that, it is always advisable to discuss with the client whether they consider they have any overseas income/gains, which has not been declared in the UK. Also consider the client’s tax position (e.g. domicile) and whether any overseas income/gains needed to be declared in the first place. If the income/gains should have been declared, the client should register to make a disclosure under the Worldwide Disclosure Facility (WDF) or apply for the Contractual Disclosure Facility (CDF).

The WDF is a disclosure facility best used for relatively straightforward cases where the actions that led to the understatements were at worst careless. It is a prescribed process, which includes completing a disclosure form online and we recommend a covering letter explaining the basis fo rthe disclosure. HMRC do not generally prosecute where a disclosure has been made (otherwise it is unlikely many would disclose in the first place).

In cases where the taxpayer deliberately understated their liability, has a very high level of tax payable and/or wishes for immunity from investigation with a view to criminal prosecution in relation to their tax affairs, it may be better to go down the CDF route. The CDF is also a prescribed process, though there are no online forms to fill in and the process is tailored to the taxpayer in relation to (e.g.) the type of tax at stake. The main difference is the formal agreement that HMRC will not prosecute for any under-declaration that is fully declared in the disclosure. There are other implications to admitting deliberate behaviour – higher penalties, potential publication of the taxpayer’s details – but for some, this could be preferable to a risk of potential prosecution. As always, take the taxpayer’s circumstances into account.

Ensure your client knows that any disclosure or review should cover all income and gains (UK and overseas) regardless of the content of the nudge letter. Any (inadvertent) false statements or incomplete disclosures could result in bigger problems and higher penalties down the line.

Requesting information from HMRC

In terms of the client’s rights, HMRC’s own manuals instruct officers “There is no obligation for HMRC to disclose every piece of information it holds. For example, you should not disclose if that disclosure would compromise an ongoing investigation.” There is no harm in asking, but there is no requirement for HMRC to provide information, particularly if the department considers the taxpayer already knows what ‘overseas income’ the nudge letter refers to.

You can also make a formal Subject Access Request to HMRC, however again the department does “not have to comply with your requests to the extent that they are likely to prejudice the prevention or detection of crime, the apprehension or prosecution of offenders, or the assessment or collection of a tax or duty or an imposition of a similar nature.” Essentially, you can ask, but HMRC are under no obligation to share the information they hold.

For help or advice in relation to HMRC nudge letters or making a disclosure, please Contact Us.

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