According to City AM, HMRC continue to pursue non compliant UK taxpayers by issuing nudge letters. As previously covered, HMRC’s use of nudge letters is a cost efficient way of recouping tax for the Exchequer without the need to launch a tax investigation into a taxpayer’s past tax compliance. But beware, there are risks for both taxpayer and adviser alike.
Is the data HMRC is acting upon correct?Probably not.
The data given freely and annually to HMRC comes as a result of the Common Reporting Standard (CRS). Financial institutions around the world have have to provide basic details on all account holders. Whilst every financial institution will have robust checks and balances in place, nevertheless mistakes can happen. Moreover, snapshot data can be taken out of context in the hands of HMRC.
Why are nudge letters cost efficient for HMRC?
It takes time and other resources to launch tax investigation, neither of which are unlimited for HMRC. The Exchequer is spending money, HMRC are there to collect their fair share of tax from all taxpayers.
A nudge letter is a simple “template” that does not have to refer to a specific taxpayer or tax year and in that way is quickly seen to be a tried and tested formula. It can be simply be based on some of the information provided to HMRC from overseas such as the tax year, financial institution or asset class such that it can be referred to, should HMRC be contacted.
What are the risks for taxpayers?
There is the financial risk that there is something to declare and a taxpayer has to pay tax, with interest and potentially a penalty. There are increased penalties if the matter is prompted by HMRC (by such a nudge letter). Moreover, matters relating to an overseas source attract a higher penalty regime as well.
Worst still for any taxpayer is the possibility that it leads to a full blown tax investigation involving perhaps the use of the Contractual Disclosure Facility.
What are the risks for advisers?
Relationships with the taxpayer can be strained. It is human nature to want to blame somebody so the offshore adviser is in prime position simply for being offshore. The consequence is that fees are unpaid.
So what shouldn’t be done?
Don’t ignore HMRC. They will not give up. To coin a phrase, they have started so they will finish.
So what should be done?
Consider just for a moment that there may be something not quite right. Do you have all the facts? Do you have the relevant expertise to come to a definitive view?