Its Christmas time, there’s no need to be afraid, its Christmas time and HMRC’s annoyed they’re not getting paid.
It’s that time of year again when HMRC send out more nudge letters or open enquiries for you to contemplate whilst tucking into your favourite festive food. Someone at HMRC, probably someone with few friends, feels the bombshell being dropped in the lead up to Christmas is just another way of enforcing whose got the upper hand. There is an obvious psychological play at hand but also the deadline for issuing an enquiry letter for the 2019/20 tax returns submitted on time closes on 31 January 2022. Given the average civil servant takes an extended Christmas holiday and will return to the difficulties of home working (maybe with a day or two in the office), it is their time to spring into action. Sending letters now leaves enough time to get the Christmas cards written up and in the post before taking a week off before Christmas. This allows visits to family members that still allow them to visit: ‘Knock knock, it’s a raid’ has probably worn off as a joke!
More importantly, this year, HMRC must catch up for the absence of activity over Covid and to recoup all the money our government spent. However, HMRC has some significant resource issues to manage significant masses of ‘investigations’ or ‘enquiries’. It may be likely that either HMRC will commercially target certain taxpayers or release a new wave of nudge letters. This could broadly mean that those receiving an enquiry notice warrant the attention of a HMRC officer rather than simply encouraging the taxpayer to come forward.
To deal with large numbers of taxpayers who may not have disclosed the right things to HMRC, nudge letters are commercially appropriate. Nudge letters are a cost-efficient way of getting people to come forward and rectify their tax position. Where a nudge letter is issued and the taxpayer later identified to have irregularities, the letter can potentially serve as leverage for higher penalties.
2021’s first wave of nudge letters regarding overseas assets, income or gains was issued at the beginning of the year. A further wave was issued in September 2021. The more recent nudge letters targeted non-UK domiciled persons who they suspected had not disclosed offshore income or capital gains. The nudge letters offered the recipients an opportunity to remedy the suspected defect outside the normal enquiry process.
Following the closure of the Corona Virus Job Retention Scheme and Self-Employed Income Support, HMRC also issued nudge letters where they suspected incorrect claims had been made. HMRC revealed earlier this year that up to £3.5 billion in Coronavirus Job Retention Scheme payments may have been claimed fraudulently or because of error. However, this September, Taxation published that the government was looking to ‘recoup a suspected £7bn of fraudulent or erroneous CJRS claims’.
On 22 October 2021 the FT reported that HMRC were to send nudge letters to crypto asset investors.
HMRC has also issued similar letters consistently to those utilising tax avoidance schemes. The letters encourage the user to enter a settlement process. Many of the remaining schemes targeted by HMRC relate to disguised remuneration.
We anticipate that nudge letters will continue for those with offshore income and/or gains, crypto currencies and where there are suspected incorrect CVJS and SEIS claims. We would also expect the range of nudge letters to broaden to include areas where HMRC has been in receipt of information following the widening of their information powers.
The powers to obtain information from third party data handlers without a taxpayer knowing were more updated to include electronic payment providers and business intermediaries who facilitate transactions i.e., digital wallets and online marketplaces.
HMRC has access to an unprecedented volume of information about taxpayers and businesses. Even ahead of the use of information powers, HMRC can access information in the public domain as well as through government bodies. A simple example is information available for land and property:
- The land registry includes details for the legal owner
- The electoral role normally includes details of the home occupier
- Council tax records normally include details of the home occupier
- Letting agents provide details to HMRC of landlords
- Insurance companies could be requested to provide details
- Employee and taxpayer details provided to HMRC include their place of residence
Information powers allow the collection of data from a broad range of data handlers with the sole view of comparing that information with that included on a tax return or accounts. HMRC have also been in receipt of information from overseas jurisdictions since 2016. They use a data analytical tool (Connect) to identify anomalies and risks. Continuing our illustration and assuming a property owner had undeclared income, the records in HMRC’s possession would easily identify properties not occupied by owners.
The same simple analysis of data provided can be used to identify those:
- Holding offshore assets or who are beneficiaries of offshore assets who haven’t declared income or gains.
- Investing in or trading cryptocurrencies.
- Selling goods on marketplaces.
Identifying incorrect CVJS and SEIS claims would require a different analysis. Some easy measures that might identify a risk would be where VAT returns showed a continued level of trading activity, which might not be considered possible where a significant proportion of the workforce were furloughed. Payroll records and RTIs (submissions to HMRC) pre and post a CVJS claim would indicate the ‘value’ of salaries for comparison. Similarly, a self-employed person claiming SEIS would not be generating as much self-employed earnings if a claim were made and historic earnings would serve as a benchmark of the potential to earn. HMRC have actively encouraged workers to report their employers (or other people’s employers) where there has been abuse.
Your nudge letter actions:
- Don’t automatically discount the nudge letter as a general or random letter.
- Check the accuracy of information you have provided to HMRC.
- If you have made an innocent mistake, you may not know but you should put it right.
- If you are aware of a deliberate act, don’t ignore the circumstances and seek specialist advice.
- Requesting professional advice will demonstrate you have acted in good faith and limit the exposure to higher penalties or even prosecution.
- Communicate appropriately with HMRC – do not be silent even if you are convinced nothing is wrong.
Failing to respond is likely to result in a formal enquiry. HMRC would have identified you as at risk. They will need to protect their position to enquire your affairs. To do so, they are likely to open an enquiry as it permits them upon discovery to look into earlier years – it protects their ability to investigate. An enquiry will inevitably lead to some disruption. If a tax liability is identified, you can suffer penalties, and these could be arguably higher if you did not respond to a nudge letter.
Whilst HMRC will use nudge letter across a widespread group of taxpayers, where they have identified an significant risk, the approach will likely be a robust intervention: opening an enquiry or issuing code of practice 9/contractual disclosure facility (‘CDF’). If the approach is a nudge letter, it doesn’t mean you are not at risk of an enquiry or COP9/CDF. It may just mean that HMRC hasn’t reviewed the data held against you in detail.
Whilst HMRC are regarded as under resourced to deal enquiries, they have received funding of £100m from the government in the spring Budget. Significant amounts are being invested to strengthen taskforces and recruit. HMRC are not only looking to recruit case handling officers but also data analysis to support identifying and scrutinising the vast amount of information now passed to them.