“Nudge nudge, wink wink, hear no more?”

“Evening Squire”

Over the years, HMRC has increasingly used One to Many or so-called Nudge Letters.

These have been thought to represent a good return on investment by HMRC. However, the latest round based on information winkled out of the Pandora Paper, seems to have yielded rather under-whelming results.

But, what’s that, you want to know what a nudge letter is?

Say no more.

The Nudge age

Born in the laboratory of a scientist madder than Dr Frankenstein (OK Behavioural Insights Team), these letters are designed to pull on anxieties that a person might have (justifiably or not) regarding their tax affairs.

The letters ‘suggest’ that  taxpayers should check their tax affairs for errors or under-declarations. A bit like Arnie might ‘suggest’ that he “needs your clothes, your boots and your motorcycle”.

Of course, they are not simply mail merge exercises to the population at large. They are based either on some data set received by HMRC (and the taxpayer is on it) or it is targeted at a specific area where non-compliance has been identified as being high.

In some respects, this may seem a lazy approach by HMRC.  If they have the data, which they invariably will, why not just open an enquiry and assess the tax they believe to be due at the end of it?

The thing is, it’s not quite as simple as that for HMRC.

Any intervention, particularly without all the facts will take time and resources, neither of which HMRC have an awful lot to spare at the moment, and might not yield anything.

But what if there was a way of persuading the taxpayer to come clean and make a disclosure all on their own and pay the tax, interest and penalties straight away?

For the cost of a stamp?

Why not send them a letter suggesting they need to check their tax affairs, due to information HMRC hold about them, and asking if they wish to come clean? Almost voluntarily?

And so about a decade ago, the first of the HMRC  “nudge letters” were issued.

The state of play on nudge letters

So, these are certainly not new and have been around for years in many guises, in varying degrees of confrontational language.

However, perhaps as a result of those pressed resources, there has been a noticeable increase over the last few years in terms of the number of letters being issued and the areas of risk being covered.

Further, the volume of information available to HMRC, even if not HMRC’s ability to process it, has increased massively over the years. Think CRS and the automatic exchange of information.

Over recent years, and in no particular order, HMRC have issued “nudge letters” to the following groups of individuals and businesses:-

• Undeclared income or gains from overseas assets
• Incorrect claims under the furloughing (CJRS) or SEISS schemes
• Profit Diversion including transfer pricing, diverted profits tax, etc.
• cryptocurrency enthusiasts
• plumbers
• barristers
• property landlords
• offshore companies that own UK property
• Suppression of electronic sales
• Income from the buying and selling of larches*

*one of the above is not really a nudge letter.

Pandora Papers – Is the effectiveness of the nudge on the wane?

However, as per the introduction, it appears that the nudge might be losing its lustre.

As readers will know, the Pandora Papers was one of the biggest ever offshore “leaks”. Taking place back in 2017, more than 13 million files from two offshore services providers and company registration offices in 19 of the world’s main tax havens was provided to the International Consortium of Investigative Journalists.

We were told in an article in the FT Weekend that the cache of information resulted in just shy of 1,000 nudge letters to UK taxpayers. HMRC received 146 responses and just 14 disclosures.

Of course, despite what some would condition us to believe, not all of those with assets overseas would have income tax or capital gains tax to pay on them. For example, they might be non-UK domiciled and only taxable on the remittance basis.

However, one would think that HMRC is disappointed with the yield from this particular gift horse of information.

Indeed, it appears that there has been a second bite at the cherry with another slew of similar letters being sent more recently.

Conclusion

Is the nudge letter a dead parrot, or is it merely resting?

It will be interesting to see whether the lack of response relates to the matters under question, or whether it shows a greater malaise to the age of the nudge letter.

 

Final thoughts

If you have received one of these “nudge letters” I would strongly suggest you speak to a professional advisor if you have any concerns about your situation.