What is a nudge letter?

A nudge letter (also known as a “one-to-many” letter) is a communication issued by HMRC to a group of taxpayers – both individuals and businesses – on a particular topic, designed to “nudge” and encourage the recipients to review their tax affairs and, where necessary, make voluntary disclosures to HMRC. 

Recipients are selected on the basis of information held by HMRC that connects such taxpayers to a potential loss of tax. This information may derive from a number of different sources, including data received by HMRC under the Common Reporting Standard (CRS) and other international information exchange agreements, as well as information collected by other government departments such as Companies House or the Land Registry.

However, whilst the letters are carefully crafted to maximise their impact, it should be noted that they are not formal enquiries and so do not necessarily indicate that HMRC has in fact identified an inaccuracy in an individual’s tax reporting. By way of example, HMRC previously issued nudge letters to thousands of taxpayers who were listed as Persons of Significant Control (PSC) at Companies House and had either not submitted a tax return in the relevant year or declared income below £100,000. This was part of a wider campaign to encourage individuals with significant control in a company to consider whether they had any undeclared tax affairs. More recently, HMRC is writing to taxpayers who have indicated in their tax returns that they may have been temporarily non-UK resident since 2018/19.

It therefore follows that a taxpayer may receive a nudge letter, not due to any reporting inaccuracies, but simply as a result of falling within a category of persons which HMRC wishes to prompt to review their tax affairs. 

As part of this nudging mechanism, the letter will often include a certificate of tax position (discussed below), which HMRC will ask the taxpayer to complete and return. 

HMRC typically specifies a 30 or 60 day period from the date of the letter within which the taxpayer should respond. Where no response is received, HMRC may issue a follow-up query. Regardless of the outcome of the taxpayer’s review of their affairs, it is prudent to formulate a plan and to engage with HMRC appropriately and promptly. 

What is a certificate of tax position?

As mentioned above, HMRC often includes a certificate of tax position with the nudge letter and asks the taxpayer to complete this. The certificate provides an opportunity for a taxpayer to formally declare the status of their tax affairs, and includes several options, including a confirmation that the relevant tax affairs have been correctly declared or that a disclosure is needed.

Fundamentally, there is no legal obligation for a taxpayer to complete a certificate of tax position. In fact, it is generally advisable that a taxpayer does not complete a certificate without first seeking professional advice. 

Making a positive declaration by way of the certificate requires a taxpayer to confirm that all information is “correct and complete to the best of their [the taxpayer’s] knowledge and belief.” This is an onerous and broad statement (the certificate does not usually restrict this confirmation to a particular tax year, nor does it usually have much space to provide further information or explanation) which puts the taxpayer at risk of making a false (even if inadvertently so) declaration as to the status of their tax affairs. Making a false statement to evade paying tax is a criminal offence. 

What should you do if you receive a nudge letter?

• Seek external professional advice. As mentioned above, the nudge letter will not necessarily be indicative that a specific discrepancy has been identified, so it is necessary first to ascertain whether or not there is an underlying concern with your reported tax affairs.
• Avoid prematurely completing the certificate of tax position. For the reasons discussed above, given the serious consequences of making a false declaration, it may be preferable to consider alternative methods of communicating with HMRC (for which see below), especially for taxpayers with complex tax affairs. If more time is needed, HMRC will often agree to extend the deadline for a response (especially given these letters are not formal enquiries).
• With external advice you may wish to provide HMRC with a written response. Drafting a written response may offer more flexibility with regards to detailing your circumstances and allow you to (i) acknowledge the nudge letter; and (ii) either explain any discrepancy (following which you must make a disclosure, for which see below) or provide confirmation that your tax return is correct. HMRC generally acknowledge in their nudge letters that there may be a reasonable explanation for any discrepancy, so this is a means of providing such explanation. In some cases (for example, where the nudge letter has been prompted by information received by HMRC via the CRS), on request HMRC may also provide the taxpayer or their advisers with further detail about the nature of the information received (e.g. what tax year this relates to and/or the nature of the foreign income and gains) – this then allows for a more tailored response. It can also help bring to light any reporting errors which may have triggered the nudge letter – for example, where a taxpayer has ceased to be UK resident but a financial institution has not correctly updated their records to reflect this and so information has been reported to the UK under the CRS in error.
• Where you or your advisers have reviewed your affairs and an inaccuracy is identified, you will likely be advised to make a disclosure to HMRC. As there is no de minimis threshold for the level or amount of the discrepancy, where any discrepancy is identified (no matter how small), you must seek to make a disclosure. However, HMRC cannot require that you complete a disclosure by a specific method, so there is flexibility as to how you disclose any discrepancies. One method would be by way of the “Worldwide Disclosure Facility”, but this is not mandatory and may not be the most appropriate in all circumstances. You should discuss the most appropriate disclosure method for your circumstances with your professional advisers. 

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