HMRC’s nudge campaigns have become a pivotal strategy in the UK’s efforts to bolster tax compliance and revenue collection. These campaigns leverage data analytics and targeted communications to identify and address potential tax anomalies without the need for extensive audits or investigations. Instead, they rely on sending “nudge” letters to taxpayers, prompting them to review and rectify their tax filings.

In her session, Tax Investigations & Disputes Update, Sarah Scala provides insight into the latest nudge campaigns initiated by HMRC, identifies the taxpayers at increased risk of being targeted, and provides guidance on how to handle such approaches effectively.

Understanding HMRC’s Nudge Campaigns

Nudge campaigns are a resource-efficient tool employed by HMRC. Instead of scrutinising individual tax returns manually, HMRC sends semi-standardised nudge letters to taxpayers based on specific data-driven campaigns. These letters usually hint at possible discrepancies in tax reporting but leave it up to the taxpayer to identify and correct the issues. The underlying data for these campaigns can come from various third-party sources, such as letting agencies, cryptocurrency exchanges, or even pet insurance records.

Key Nudge Campaigns in Focus

1. Rental Income Disclosures

One of the primary targets of recent nudge campaigns has been undeclared rental income. HMRC has collaborated with letting agencies to obtain data on landlords, properties, and rental transactions. By comparing this information with self-assessment records, HMRC can identify discrepancies where rental income appears to be underreported. Taxpayers receiving such letters are prompted to disclose any undeclared rental income, ensuring that all earnings are properly taxed.

2. Foreign Income and Gains

Another prominent focus is on foreign income and gains. HMRC has issued letters to taxpayers with financial interests abroad, particularly in the US. These letters suggest that taxpayers may have failed to report income or gains that are subject to UK tax, despite any taxes paid in the foreign jurisdiction. Double taxation agreements typically mitigate the risk of being taxed twice, but taxpayers are still obliged to report their global income to HMRC accurately.

3. Cryptocurrency Transactions

With the burgeoning popularity of cryptocurrencies, HMRC has turned its attention to this emerging asset class. Cryptocurrency transactions are notoriously challenging to trace and tax accurately. However, HMRC's recent nudge letters to taxpayers involved in crypto trading suggest a concerted effort to address this issue. Taxpayers are often asked to re-evaluate their tax returns, with a focus on ensuring that all relevant crypto transactions are properly reported as either capital gains or trading profits.

4. Breeding and Selling Puppies

A unique and perhaps unexpected target of HMRC’s nudge campaigns is the breeding and selling of puppies. During the pandemic, the demand for pets surged, and HMRC has identified this as a potential source of undeclared income. By obtaining data from pet insurance registrations, HMRC can trace transactions and write to those involved, prompting them to disclose any income from breeding activities.

Taxpayer Risk Factors

Certain taxpayers are at a heightened risk of receiving nudge letters based on the nature and extent of their financial activities. Key risk factors include:

• Landlords dealing with rental properties, particularly those who may not have declared all rental income or expenses.
• Individuals with overseas financial interests, especially in countries with which the UK has active data-sharing agreements.
• Cryptocurrency traders who engage in frequent transactions or hold significant crypto assets.
• Breeders and sellers of animals who may engage in periodic sales but have not reported such income.

How to Handle an Approach from HMRC

Receiving a nudge letter from HMRC can be unsettling, but it is crucial to handle the situation with care and diligence. Here are steps and strategies to manage such an approach effectively:

1. Immediate Review and Assessment

The first step upon receiving a nudge letter is to conduct an immediate and thorough review of your financial records. Identify any potential discrepancies or omissions that could have prompted HMRC's communication. Engaging a qualified tax advisor at this stage is highly recommended, as they can provide expert guidance on interpreting the letter and reviewing your financial situation.

2. Honest and Transparent Discussions

It is paramount to have frank and transparent discussions with your tax advisor about all possible income sources. Often, clients may not fully disclose their financial activities either due to misunderstanding or intentional omission. Full disclosure ensures that any issues are appropriately addressed and reduces the risk of being accused of concealment by HMRC.

3. Prepare a Comprehensive Response

If discrepancies are identified, your advisor will help prepare a comprehensive disclosure to HMRC. This should include all relevant financial details and a clear explanation of any errors or omissions. The goal is to present an accurate and complete picture to HMRC, addressing their concerns proactively. Even if the discrepancies do not result in a significant tax liability, preparing a formal response is essential to demonstrate compliance and transparency.

4. Professional Representation

Having professional representation can significantly ease the process. Your tax advisor or accountant can liaise with HMRC on your behalf, ensuring that all communications are handled professionally and that your interests are protected. This can also mitigate the stress and complexity of dealing with tax authorities directly.

5. Consider the Long-term Implications

Beyond addressing the immediate nudge letter, consider the long-term implications of your financial reporting. Regular reviews of your financial activities and proactive disclosure of any new income sources can prevent future issues with HMRC. Establishing robust record-keeping practices and maintaining open communication with your tax advisors are key to sustained compliance.

HMRC’s nudge campaigns reflect a strategic shift towards leveraging data and targeted communication to enhance tax compliance. By understanding the key areas of focus and recognising the risk factors, taxpayers can better prepare for potential HMRC approaches. Handling nudge letters with care, transparency, and professional guidance is essential to resolving any issues and maintaining compliance. As tax enforcement continues to evolve, staying informed and proactive is crucial for all taxpayers.

For the full session, please click here. This includes:

• The status of my R & D enquiry cases and my experience of the individuals leading those cases at HMRC.
• HMRC’s latest nudge campaigns. Which taxpayers are at increased risk of being targeted and how should one handle an approach from HMRC?
• My dealings with HMRC’s criminal and civil investigators. Including my views on the effectiveness of HMRC’s case selection process.
• Taxpayer Success in challenging HMRC decisions. What factors influence the likelihood of overturning a HMRC decision?

The contents of this article are meant as a guide only and are not a substitute for professional advice. The author/s accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article. The information at the time of publishing was accurate and could be subject to final changes.