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  • Katherine Bullock

Thinking Big – Offshore Tax 2021 – A gentle nudge on overseas assets

As most practitioners with clients holding offshore assets will know all to well, there are a wide variety of tools and strategies at HMRC’s disposal to pursue whatever tax it believes is owed. These range from informal inquiries all the way to strict liability criminal offences and knowing how each works can be essential in ensuring that you are not caught off guard.

" may be wondering what should be done if one were to receive a ‘nudge letter’ considering the perils and pitfalls involved..."

For these tax payers, a relatively new tool in HMRC’s box is the ‘nudge letter’, a tactic made possible by the adoption of the Common Reporting Standard (CRS) in 2017 and the subsequent sharing of information by and to HMRC from across the globe. Whilst they are becoming increasingly common, they can still be alarming when received. Sometimes the client phones their tax adviser, wracking their brains as to what might have prompted the letter, unable to think of anything. Does the letter then just go on file? Sometimes the client files it in the waste paper basket without troubling his adviser – why pay fees over nothing? – or worse still fills out the form without thinking and sends it back. Or perhaps the taxpayer suspects a phishing expedition and does not respond.

Firstly, what is a ‘nudge letter’? Well, quite simply, it is a letter from HMRC intended to give you a ‘nudge’ towards disclosing anything that might have been left off your tax returns, whether by accident or by “accident”. They are usually sent in response to information HMRC has received via the CRS that indicates that an overseas taxpayer’s returns do not square with the amount which HMRC believes is owed. This does not always mean that the taxpayer has made a mistake but sending out these letters makes a lot of sense to HMRC, considering the relatively low cost compared to the potential to recoup large amounts of tax which would otherwise remain unpaid by individuals unaware of their obligations to pay any UK tax. On the surface this all seems very gentle and civil of HMRC, which some may feel is a departure from their usual form! This impression may not hold up quite so well if one considers what is actually contained within a ‘nudge letter’.

A ‘nudge letter’ will typically suggest that HMRC has decided that the taxpayer’s returns do not match up to what they believe is owed and will provide a number of reasons why this might be: a simple mistake has been made, the taxpayer is relying upon outdated tax advice, or professional tax advice may be required. They suggest that the taxpayer takes a full account of their affairs before promptly replying to the letter to make HMRC aware of any disclosure that needs to be made, or the reason why their returns are correct in their departure from HMRC’s estimates. The more insidious aspect of these ‘nudge letters’ lies in the enclosed ‘certificate of tax position’, wherein the taxpayer is encouraged, with no limits on the timeframe or quantum to which they are attesting, to state categorically that their affairs are correct, incorrect, covered by allowances or reliefs, or not liable for UK tax. While this declaration is entirely voluntary, and HMRC has no legal means to compel the recipient of the ‘nudge letter’ to complete or sign it, a taxpayer who does so can face criminal prosecution for a false statement made by means of the certificate.

Furthermore, HMRC will treat any disclosure following the receipt of a ‘nudge letter’ as having been prompted, and as such the taxpayer will be unable to qualify for full mitigation from any penalties that might arise as a result of incorrectly filing their tax return the first time around. This is the less obvious purpose of the ‘nudge letter’, which potentially increases penalties levied for a careless mistake or deliberate false report of taxes owed.

And so, you may be wondering what should be done if one were to receive a ‘nudge letter’ considering the perils and pitfalls involved. Firstly, it would be wise to heed HMRC’s advice and take full stock of one’s affairs and position upon finding a ‘nudge letter’ in one’s inbox. HMRC only sends these letters where it feels it has actionable information, and so even if no mistake has been made, there is something that HMRC feels is suspicious, and it should be addressed in order to avoid further, more formal enquiries. This should preferably be done, after taking professional tax advice if appropriate, in writing within 30 days of receiving the ‘nudge letter’. The ‘certificate of tax position’, as mentioned above, has no legal force which requires it to be completed, and given the repercussions of doing so, it should be very carefully considered, preferably with professional advice. However, if HMRC does not hear back at all, they will inquire further and may escalate matters, so doing nothing is not an option!

In short, a ‘nudge letter’ can be nothing more than HMRC noticing some numbers not adding up and writing to ask you to double check your perfectly correct accounts. On the other hand, it can also represent the opening stages of a thorough investigation into what HMRC feels are unpaid taxes which are due. In any case, receiving a ‘nudge letter’, whilst not a cause for panic, is a matter which requires prompt and careful attention. So long as you have been diligent in keeping your affairs in order and respond appropriately, these ‘friendly reminders’ from HMRC are certainly an improvement over leaping straight into a formal enquiry – to be respected, but not feared!


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