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HMRC's nudge letters

Nudge nudge wink wink.....

In July 2020 HMRC issued a report[1]on measuring the tax gap.   HMRC states that in the tax year 2018-19 the tax gap was £31bn or 4.7% of total tax liabilities.

The tax gap is the difference between the amount of tax that should have been paid to the government and the amount HMRC has actually received. Out of the amount that HMRC state should have been paid, the largest gap is with the customer group of small businesses (£13.4bn).  The second largest is from capital gains tax (£12.1bn). HMRC state that they consider that 18% of the tax gap is due to the taxpayer’s failure to take reasonable care when filing his or her tax returns.

In 2010 HMRC paid BAE Systems to create a data matching supercomputer called Connect.  Connect allows HMRC to analyse and crossmatch huge quantities of data from numerous online interfaces, including the most common sites most of us use on a daily basis from DVLA to Instagram. Such was the cutting-edge technology that the Connect system won numerous IT Industry awards and, although eye wateringly expensive, it has now paid for itself many times over.

Connect, through its two main channels of Analytical Compliance and Integrated Compliance, can now quickly furnish HMRC analysts with evidence of relationships, assets, lifestyles, and fraud across multiple jurisdictions which previously had taken months or years of employee footwork to discover.  The evidence is presented in a user friendly format to the HMRC analyst and is then used to focus more specifically on areas of risk or non-compliance, improving case selection for enquiry and separating criminal intent from failure to take reasonable care.

Where once HMRC was reactive to anonymous tip offs from aggrieved neighbours, spouses, and employees, they are now using ‘fact’ based material and are becoming proactive in pursuing unpaid tax receipts.  However, as with most ‘facts’ emanating from the internet, sometimes fake news prevails and the House of Lords’ Economic Affairs Committee has called for a review of HMRC’s powers to ensure that their powers are not being abused.

The nudge letter will provide details of the information HMRC is attempting to check and will ask the addressee to consider whether they should have paid capital gains tax on that disposal. The letters will advise taxpayers to either amend their return or use HMRC's digital disclosure service, if necessary.

These letters could lead to a long and drawn out enquiry which is inevitably expensive and stressful. Taxpayers are advised not to ignore these letters but to discuss them with their legal and accountancy advisors and to carefully consider the best response to provide to HMRC.

Following the EU referendum in Britain resulting in ‘Brexit’ many people were forced to make life decisions that they were not expecting to make, including British Nationals leaving their principal residence  (home) in mainland Europe and returning to take up residence (live) in the UK.  The unforeseen result of this is that the principal residence they once lived in abroad may now no longer qualify for Private Residence Relief, whether or not it is their only property or in fact a second home (irrespective of an election), if they are unable to satisfy a 90 day “residence” (living) requirement in the jurisdiction where that residence (home) is, having become UK tax resident on their return to these shores.

Although failure to make the appropriate declaration will be considered to be careless of the taxpayer (rather than intentional) the result could still be an additional and unexpected tax liability and, unfortunately, a penalty. 

If you receive a nudge letter and you would like advice on how best to approach HMRC with your response please get in touch with your usual contact at MTG.


[1] https://www.gov.uk/government/statistics/measuring-tax-gaps

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