HMRC’s use of nudge letters, or ‘one to many’ in HMRC-speak, has become an increasingly popular tool to target larger groups of taxpayers. This article looks at why HMRC has moved to using this method as its favoured way of encouraging taxpayers to come forward and disclose their irregularities, as well as giving readers advice on appropriate ways to respond.
Recent examples of HMRC nudge campaigns include those concerning the Pandora Papers; ATED returns; R&D but there have been many other examples over recent years. There is also no indication that HMRC will change its approach because of the perceived success of reaching taxpayers en masse. Nudge letters have the potential to result in high financial returns for little outlay.
What are nudge letters?
The aim of any nudge letter is to influence the behaviour of the recipient of the letter, so they are more likely to comply with their tax obligations.
Although nudge letters can cover a wide range of topics, where they are alike is that they all provide a carefully crafted message designed to influence a group of taxpayers’ actions. HMRC guidance confirms that any nudge letter campaign must be proportionate to compliance risks identified. This means that if you or your client receives a letter, there will be a reason for this. Ordinarily this will be because HMRC holds information that connects the individual to a potential loss of tax, but it is not uncommon for HMRC’s information to be inaccurate or out of date. For that reason, taxpayers and agents are reminded that a nudge letter is not an actual allegation of wrongdoing, but a prompt for the position to be reviewed.
What role does behavioural science play?
HMRC’s nudge campaigns are designed in conjunction with The Behavioural Insights Team (BIT) who are now entirely independent from government, who from February 2014 sit within Nesta, who describe themselves as the UK’s innovation agency for social good. BIT specialises in advising organisations how giving clients a gentle nudge using research and data focussed on human behaviour can help businesses achieve their strategic objectives.
In practice this means that the language used in HMRC’s nudge letters is very deliberate and seeks to take advantage of the likely emotive response of the recipient when a nudge letter arrives. For example, behavioural science teaches us that we are more likely to follow a particular instruction if we are presented with evidence that others have already taken the desired action. So HMRC will include statements in their letters such as, ‘X number of taxpayers in your position have come forward and made a voluntary disclosure to HMRC.’
HMRC may also make use of case studies, which is particularly prevalent in the realms of targeting users of tax avoidance schemes. They know that taxpayers in this position are often distressed and are unsure what they should do, and learning that others in identical circumstances have settled with HMRC will increase the likelihood of them doing the same.
How to respond to a nudge letter?
A nudge letter is neither a compliance check or formal enquiry but should still be given the proper care and attention it requires. This is because nudge letters are not sent entirely speculatively and are based on intelligence.
That means that even where no issues are discovered it is better to respond to HMRC acknowledging receipt of the nudge letter; provide a comment on the work undertaken to review the position and then confirmation that the taxpayer’s affairs are correct to the best of their knowledge and belief.
Some nudge letters ask the taxpayer to complete and return to HMRC a Certificate of Tax Position (CTP). There is no statutory basis compelling a taxpayer to complete the CTP, and there is a theoretical risk the taxpayer or their agent could unwittingly commit the offence of providing false documentation to HMRC if the CTP contains inaccuracies. CTP’s are often ambiguous and lack clarity on the tax years covered and the heads of tax to which they relate.
How do I make a disclosure?
If having viewed yours, or your client’s position, you conclude that a disclosure is required but choose not to make a voluntary disclosure then you can expect HMRC to commence a formal tax investigation at some point in the future. The downsides of adopting this approach include:
- Not retaining control over the enquiry and facing uncertainty that can last many months or years.
- Higher financial penalties.
- The risk that HMRC will start focusing on other aspects even if there are no other issues to disclose.
If you would like to discuss the voluntary disclosures please contact Menzies’ Tax Disputes and Disclosures team on the free confidential hotline below:
Call our free confidential hotline – 020 7465 1900
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