Confusion and alarm from HMRC’s nudges
HMRC has been sending generic letters to nudge taxpayers into reviewing their last tax return, but the agent’s copy of the letter doesn’t always specify which taxpayer it relates to.
HMRC uses data from many different sources to cross check information reported on self-assessment tax returns. It could open an enquiry every time a mis-match is found, but this is expensive in terms of person-hours, and the time taken to collect any additional tax.
Low cost solution
As an alternative HMRC is experimenting with sending a standard letter to the taxpayer where the computer finds that the third-party information doesn’t match the tax return. The letter doesn’t state exactly what is missing from the return, but it is supposedly designed to nudge the taxpayer to review and correct the return where necessary. HMRC call these “one to many” letters.
This approach is light on HMRC manpower as the nudge letter is generated automatically by HMRC’s Connect computer system. The onus is placed on the taxpayer and their tax agent to investigate the issue and take any action required.
Unfortunately, where the HMRC letter is copied to the tax agents it doesn’t always state which taxpayer the letter refers to.
AccountingWEB member PaulinLeeds had just such a missive from HMRC in November 2020. It asked him to check his client’s pay and benefits in kind, as the figures on an earlier tax return don’t agree with the employer’s RTI return. The letter contained no client reference or name, and failed to include any HMRC contact details such as an address or telephone number to respond to.
Other AccountingWEB members have reported receiving similar generic letters from HMRC, some of which do include an HMRC email address to reply to.
What to do
It is extremely frustrating for tax agents, who are working all hours to submit the SA tax returns before the end of January, to break off and deal with such HMRC letters. Should the tax agent waste precious time trying to find out which client the letter refers to, or ignore the issue and potentially leave a client with a large penalty for non-compliance?
Not an enquiry
It is important to note that the HMRC nudge letter does not amount to a formal opening of a tax enquiry. However, the CIOT recommends that taxpayers, and their agents, should not ignore the letter as HMRC may follow-up if the earlier tax return is not amended.
HMRC has been comparing the 2018/19 SA tax returns to various data sets and has been sending nudge letters covering a wide variety of issues since October 2020. The CIOT has kept a log of all the nudge topics covered, including examples of the letters and information sheets, which can be accessed from the links in the table below.
The whole one-to-many (OTM) approach is an experiment, as is made clear by the HMRC compliance handbook para CH60270.
The HMRC officer is instructed to pick a population to target and compare the behaviour of the recipients of the letter to a control group. The success factors for the experiment are listed as:
- increase in profit
- increase in tax paid
- expenses reduced
- the taxpayer’s behaviour has changed – will any action the customer takes be classed as a change in behaviour?
- increase in registrations
- a taxpayer amends a return
- taxpayer has filed on time due to the approach.
Oddly the correcting the tax return to include additional expenses or to claim a missed allowance does not appear to be a positive outcome for HMRC.
Nudge letter topics
|Which taxes||Which taxpayer||Transaction / issue||Data from:|
|CGT||Individuals||Sale of residential property which was not their main home, in 2018/19||Land registry|
|CGT||Individuals||Property described as other assets||SA returns 2018/19|
|Income tax||Employees||Benefits in kind from employment in 2018/19||P11d and RTI retruns|
|Income tax||Wealthy individuals||Investment income in 2018/19||Financial institutions|
|CGT||Shareholders of unlisted companies||Deferred consideration on the earlier sale of private company shares||Companies House filings and stamp duty returns|
|Income tax||employees||Discrepancies with RTI returns||employers|
|Incometax||Directors of mid-sized companies||Understated dividends or benefits||Company accounts|
|Income tax and CGT||Non-dom individuals||Deemed domicile||Earlier tax returns|
|Income tax and CGT||Non-resident individuals||Statutory residence test||2018/19 SA return|
|Income tax and CGT||Individuals||Outstanding tax returns||2017/18 notice to file|
|Income tax||Individuals||Foreign tax credit relief against employment income||2018/19 SA return|
|Income tax||Individuals||Overseas workday relief||2018/19 SA return|
|Income tax||Individuals||DTA relief||2018/19 SA return|