Crypto Assets: Decoding HMRC’s Nudge Campaign

Have you heard about HMRC’s campaign against crypto assets?

HMRC has initiated a strategic campaign using ‘nudge letters’ targeting individuals suspected of possessing crypto assets. This drive by the tax authority into the domain of cryptocurrencies raises pertinent questions: What motives lie behind this concerted effort? And what actions ought to be taken if you or a client become a recipient of such correspondence?

Navigating the taxation reform concerning crypto assets proves intricate and often diverges from conventional tax practices. Surprisingly, even purchasing a non-fungible token (NFT) could trigger a taxable event, culminating in an unforeseen and unwanted HMRC brown envelope landing on your doorstep.

Within this initiative, there exist two primary types of letters you might come across: the enquiry notice and the nudge letter.

The former, an enquiry letter, can prove considerably discomforting as HMRC seeks information and expects comprehensive responses.

The nudge letters adopt a less menacing stance, serving as ‘gentle’ prompt for action. Unlike an enquiry, responding isn’t always mandatory; it’s advisable to ensure tax affairs are in order, but HMRC might not explicitly demand or anticipate a reply. Nudge letters are either targeted at a particular risk that needs to be corrected or are ‘educational’ to identify common errors.

The previous nudge campaign involving crypto assets commenced in December 2021, HMRC subsequent campaign started in December 2023 – an early Christmas present if you will. A notable change this time is the delivery method—HMRC has employed email communication, potentially liable to overly enthusiastic spam filters. Also, it is fair to say plenty of taxpayers may view these emails, provided they get through the spam filter as a potential scam.  The exact volume of emails dispatched remains uncertain; however, HMRC doesn’t cast this net indiscriminately, targeting individuals they believe to hold crypto assets.

Similar to the 2021 initiative, this educational nudge primarily aims at rectifying common mistakes and does not necessarily mandate a response. Nevertheless, prudently reviewing tax affairs—whether personal or client-related—becomes advisable as HMRC tracks who modifies their tax returns. Errors often surface due to a lack of awareness; for instance, not all crypto asset holders realise that crypto-to-crypto transactions carry taxable implications, perpetuating a common misconception. In instances where there are suspicions of undeclared taxes, scrutinising previous tax returns becomes imperative, potentially requiring a disclosure if required.

Disclosures prove beneficial in acknowledging tax liabilities pre-emptively, forestalling HMRC enquiries. The rationale behind making disclosures stems from the possibility of reduced penalties. Failure to act subsequent to a nudge letter, upon an eventual HMRC enquiry, might amplify penalty levies (possibly reaching up to 200% of the tax owed). Given that penalties are conditional on circumstances, seeking professional counsel remains advisable.

A thoughtful approach is crucial while contemplating disclosures, ensuring comprehensive and timely submission of all pertinent information. HMRC has recently introduced a dedicated disclosure service for crypto assets, underscoring the sustained emphasis on this domain. In cases of deliberate understatements, employing the Contractual Disclosure Facility can offer a degree of safeguard against legal repercussions.

However, a common query arises: can HMRC indeed track all individuals? HMRC’s data aggregation incorporates a vast spectrum of sources. The direct extraction of information from crypto asset exchanges and the utilisation of international tax agreements for data procurement are among their strategies. The recent unveiling of the Crypto Asset Reporting Framework (CARF) by HM Treasury accentuates the drive for transparency in taxing crypto assets. Over 50 jurisdictions have committed to endorsing CARF, furnishing HMRC with substantial data. Once integrated into Connect, HMRC’s data analysis tool, this information will facilitate the identification and risk assessment of taxpayers.

If you have undeclared income from crypto assets or have concerns from anything raised in this article then please call a member of the team 03332 074404

We have written at length on HMRCs Nudge Campaigns for more further reading can be found here

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