HMRC Nudge Letters update

This year, HMRC have sent out nudge letters addressing a range of different industries and taxes including non-domiciled individuals and personal taxes, IR35 letters to the Oil, Gas and Finance industries as well as cryptocurrency transactions. This article will focus on the new cryptoasset nudge letters and personal taxation for high net worth and/or non-domiciled individuals.

General approach

Historically, HMRC appears to have been focusing on undeclared UK taxes arising from overseas assets, with information brought to HMRC’s knowledge as a result of the automatic exchange of information under the Common Reporting Standard. Over the past few months, HMRC have sent out nudge letters requiring individuals to review:

• Remittance basis claims;
• P11D and P14 submissions;
• Foreign tax credit relief claims; and
• Cryptocurrency transactions.

Clearly HMRC has widened the net in relation to the areas covered by nudge letters and the good news is the letters longer enclose certificates to be completed by the client confirming all tax affairs are in order.

The increased use of nudge letters indicates that this approach is working – HMRC highlights areas of risk, encourage taxpayers to review their affairs and make disclosures where necessary, with the (unspoken) threat of an enquiry if no action is taken. Since the vast majority of taxpayer errors are not deliberate and most prefer not to be the object of an HMRC investigation, this approach is preferable. It also means that HMRC can focus their resources on fraud investigations which tend to yield higher tax and penalties.

It is easy to see where individuals may have made a mistake with Foreign Tax credits and for the P11D and P14 figures, a simple reconciliation should resolve the issue. The other two areas are a little more complex and would likely need more in depth exploration to identify and resolve concerns.

Remittance Basis claims

These letters indicate that HMRC has concerns about a 2019/20 claim made to use the Remittance Basis of UK taxation. This could be either a query on the validity of a domicile claim, how long an individual has been UK tax resident or whether the remittances to the UK were correctly calculated.

It could also be as simple as not ticking the correct box on the individual’s tax return.

In all cases, it is worth

• reviewing the individual’s UK tax residency to ensure they are still eligible to use the RB. Remember, years where the individual was (e.g.) a minor or studying are still counted for UK tax residency purposes even if the individual was not filing tax returns;
• considering whether the client’s domicile position may have changed in light of the changes to tax legislation in 2008, 2013 and 2017; and
• Whether the remittances have been calculated correctly.

The letter provides a lot of detail on the tax technical aspects of residence and the remittance basis so be aware that some clients may be tempted to review their affairs and respond independently of an adviser. In these cases, it is better for an adviser to be pro-active and highlight areas of risk to the client before the client responds directly to HMRC.

Cryptoassets

An article by the Financial Times includes a statement from HMRC advising that they will shortly be sending out letters to those who HMRC believe have undertaken cryptoasset transactions. The letters are unlikely to be specifically targeted, but will be sent to anyone whose details have been shared with HMRC. It is possible that cryptoasset platforms are some of the Financial Institutions (FIs) referred to in the new FI Information notice legislation. The platforms are likely to be custodial, depository or investment institutions as defined in HMRC’s manuals and according to the Common Reporting Standard.

Obtaining information from these institutions has suddenly become very easy for HMRC and a number of cryptoasset platforms shared details of their users with HMRC earlier this year. Details of the information HMRC was provided with came to light from a freedom of information request by Gherson Solicitors in July 2020. The article states that: “

• HMRC has used powers provided by parliament to gather information from entities about their customers’ transactions in, and holdings of, cryptoassets;
• HMRC has exercised rights under International Treaties to request information from other tax administrations to obtain information held by cryptoasset exchanges and data holders outside the UK;
• HMRC also received data derived from cryptoasset exchanges about their users as part of spontaneous exchanges of information from other tax administrators;
• HMRC is gathering personal data in the form of names and addresses;
• HMRC is gathering data from exchanges about customers who are both one-time and recurring customers;
• HMRC is gathering information about frequency of transactions/trades;
• HMRC is gathering information about the value of cryptoassets belonging to clients;
• HMRC has requested bulk data from 2017/18 to 2019/20;
• HMRC has received information on name, address and values of cryptoassets belonging to their clients;
• HMRC has received information from exchanges for 2017/18 to 2019/20 inclusive.”

We can infer therefore that individuals will not receive the nudge letters at random. HMRC will be sending out the letters on the basis of the information provided, though this does not necessarily mean there is definitely an under-declaration of tax. Advisers should discuss with their clients whether there were any transactions and review these in conjunction with HMRC’s guidance to understand whether the transactions are taxable.

For example, individuals may consider that conversion from one cryptoasset to another is not a sale for CGT purposes. However, it is still disposal (exchanging a token for a different type of token) and advisers must then consider whether a disclosure should be made.

Responding to letters

We recommend that advisers review the issue with the client along with any bank statements and other relevant documentation. If a disclosure needs to be made, this can be done via the Digital Disclosure Service or the Contractual Disclosure Facility (if there was deliberate behaviour). The disclosure route needs to be considered carefully to best protect the client, minimise penalties and mitigate the risk of a full investigation, particularly for High Net Worth Individuals.

Even if a disclosure does not need to be made, we recommend advisers respond to the letter to mitigate the risk of an enquiry.

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