Nudge letter increase

HMRC have recently been ramping up their use of nudge letters. Sent to a specific category of taxpayers or used to target a type of taxable activity, HMRC hopes they will ‘nudge’ an individual into making a disclosure of unreported income or amending a tax return.

HMRC describe this as “a process of issuing a common message designed to positively influence customer actions”.

Although these messages may not be positively received, it is certainly true that nudge letter campaigns are a cost-effective way for HMRC to ensure taxpayers bring their tax affairs up to date and correct any errors.

Nudge letters are not an enquiry or compliance check, but they do indicate HMRC considers there is a potential risk, so it is important not to ignore them as this could put you at risk of a formal enquiry.

If an enquiry is opened and it is found that you made an error, your failure to take action earlier can mean higher penalties are charged. It may interest you to know that HMRC opened 299,000 compliance checks in the 2022/23 year and the ‘compliance yield’, which is revenue that would have been lost to the Exchequer without intervention, was a staggering £34 billion.

There are a couple of recent campaigns for businesses to be particularly aware of.

From the beginning of February, HMRC have been writing to company directors to tell them they may have unreported dividend income to declare.

HMRC have powers to obtain information from various third parties, and in this case, have sourced data from Companies House. If company reserves have fallen despite the company making a profit, this could suggest that a dividend or distribution has been paid out.

Affected director shareholders may find a brown envelope on their door mat asking them to report any undeclared dividend income or confirm there is no further income to declare.

It is important not to panic if you receive a letter; do remember that for the 2022/23 and earlier tax years, you will have been entitled to a tax-free dividend allowance of £2,000, although this is reduced to £1,000 in the current tax year and £500 from 6 April 2024. Dividend tax rates are lower than those on income, so dividends are still a legitimate and effective form of remuneration from a tax perspective.

We have also been made aware that HMRC have now launched a further campaign targeting mid-sized businesses and asking them to review their Annual Investment Allowance (AIA) claims.

The AIA is a valuable relief that allows companies to claim 100% of the cost of plant and machinery as a deduction when calculating profits.

The AIA amount has changed several times over the years, which can lead to confusion and overclaiming. The annual investment allowance was increased from £200,000 to £1 million for investment made from 1 January 2019 for a period of two years. This was then temporarily extended until 31 March 2023. The threshold reverted to £200,000 from 1 April 2023.

HMRC are also concerned that in company groups or situations where there is common control, the AIA has not been split amongst the different companies and therefore has been overclaimed.

The AIA must also be adjusted where you have a longer or shorter accounting period, and mistakes are common in these scenarios.

It is important that companies check their position and get help to respond to HMRC in the correct way.

To date, nudge letter campaigns have focused on various topics (some examples below) and several of these are ongoing. As you can see, they target both companies and individuals, and new campaigns are launching frequently.

• Coronavirus Job Retention Scheme (CJRS)
• Annual Tax on Enveloped Dwellings (ATED)
• Overseas income and gains – HMRC receives financial information about UK taxpayers from over 100 overseas territories under the Common Reporting Standard
• Self-Employment Income Support Scheme (SEISS) grants
• Income from short term property letting
• Super-deduction
• Business Asset Disposal Relief (BADR) lifetime allowance
• Residential property disposals
• Online marketplace trading

If you receive a nudge letter, you are usually asked to sign a form and return it to HMRC within 30 days to confirm your tax affairs are correct or you need to make an amendment or a disclosure, often with a tick-box form to complete.

These letters need careful management, and it is important to seek professional advice rather than signing anything.

Given the vast range of information HMRC now has at its fingertips, your risk of receiving a nudge letter has never been greater.

The good news is Kreston Reeves has an experienced Tax Disputes team who understand it can be stressful to receive a nudge letter and can review your tax position and act on your behalf with HMRC where necessary.

If you would like further information, please get in touch.