Nudge letters are not an investigation. An investigation in law will quote the legislation under whichever tax and for what year(s).
As their name suggests, “nudge letters” give a taxpayer a gentle nudge based on information received by HMRC. However, HMRC are not saying exactly what they have concerns about and the nudge letter itself may not always give the taxpayer any further clues.
Since 2017, H M Revenue & Customs has been following up on information that they have received from overseas under the Common Reporting Standard (CRS). Such information is passed automatically each year between countries. The trigger to pass on such information is where the taxpayer lives in one country but has income or gains from another country as defined by the postal address on the financial account. So, for example, a UK taxpayer with a property in say France may have given a UK postal address to the solicitor, the bank or the local utility provider.
Very few mistakes are made but nevertheless mistakes are not impossible.
Every financial institution (bank, building society, stockbroker etc.) that may operate a financial account on behalf of a client is required to send summary information to
31 December each year by the 31 May following. In the UK, HMRC takes approximately 4 months to then process and briefly check the information before writing the nudge letter to the taxpayer.
HMRC will write the initial nudge letter in the November and follow it up with another letter approximately two months later. If no response is received after that, a decision is taken buy HMRC as to whether the matter should be escalated to a formal tax investigation immediately or deferred until a further nudge letter is sent out in the following year.
It is unwise to ignore any such letter from HMRC.
Nudge letters can relate to any tax but are often related to income tax and capital gains tax.
This will depend upon all the relevant facts of a taxpayer.
Anyone born and bred in the UK with assets held overseas will be taxable in the UK on the same amounts but any foreign tax paid can be deducted.
There can be complications over which year or tax year the income and gains may relate to. The information under CRS is on a calendar year basis whereas the UK tax year runs to 5th April.
It can be unclear what the currency is that the numbers relate to. For example, a French bank account will be in Euros but this will need to be converted to sterling.
But then what exchange rate is to be used?
Actual exchange rates or an annual average exchange rate or the prevailing exchange rates as at 31st December?
Accompanying a “nudge letter” can be a Certificate of tax position that HMRC asks the taxpayer to sign and return within 30 calendar days. A taxpayer is offered 4 alternative pre-worded answers. Any of the answers may be correct or often, none of the answers are correct. It is very dangerous for a taxpayer to get this wrong as it can lead to a criminal prosecution.
Specialist advice should be sought immediately in order to determine what response should be given to HMRC.