HMRC’s use of nudge letters in 2023 – what are they and what you should do

The theory behind nudge letters 

Nudge theory was made popular in 2008 following Richard Thaler and Cass Sunstein’s book, Nudge: Improving Decisions About Health, Wealth, and Happiness.  

Nudge Theory is a flexible and modern concept to understand how people think, make decisions, and behave. The concept helps people to improve their thinking and decisions, manage all kinds of changes, and identify and change existing influences. 

Widely used in social, economic and political agendas. Perhaps the most popular example is the image of a fly painted on a men’s urinal to stop them missing. In theory, men can’t help but take aim! 

How HMRC use nudge theory 

The purpose of the HMRC nudge letter is to put the onus on the taxpayer to review their tax returns and finances and checking whether further income, gains or profits need to be notified to HMRC. By issuing the nudge letters they are hoping to bridge the gap between tax collected what HMRC believe they are owed.  

Letters are typically sent out en-masse as a campaign and relate to specific areas of tax (see below). The formally worded letters are aimed to get a response from the recipient. Sent from HMRC’s Risk and Intelligence Service they often include a Certificate of Tax Position. The Nudge letter tells the taxpayer they need to sign the certificate to confirm their tax affairs are up to date. If they aren’t up to date, there is the use of disclosure facilities to do so. Making a false statement about your tax affairs can lead to criminal prosecution.  

If you receive a nudge letter it does not necessarily mean you have made an error on your tax return, but you need to ensure that you respond correctly to HMRC. 

What should you do if you receive a nudge letter? 

Don’t panic and don’t ignore it! If you receive a nudge letter from HMRC you should seek help from a suitably qualified tax adviser. HMRC usually give you 30 days to respond to the letter, before any action is taken. Whilst it is important to respond promptly to HMRC, if you cannot provide an answer in this timeframe an extension can be requested.  A tax adviser will be able to communicate with HMRC about its requirements, asses the reason for the letter and calculate what, if any, tax may be due. 

How Edge Tax Professional Services can help 

If you have received a nudge letter, we will be able to review you tax position and make an assessment on whether or not a disclosure is needed. We have worked with numerous taxpayers and their agents to bring historical issues up to date. 

If you choose to work with us, you can expect that we will: 

• Review the background of your case and identify issues that need to be disclosed. 
• Advise on the most appropriate steps to ensure a full disclosure is made to HMRC to reduce the possibility of HMRC asking follow-up questions 
• Calculate the underpaid tax whilst ensuring all claims for tax relief / allowances are taken into account 
• Act as a go between you and HMRC so that you do not need to speak directly with HMRC 
• Advise you on the likely penalty position and consider all mitigating factors to reduce penalties as low as possible 

• Be able to assist you with your ongoing tax returns if you wish to appoint us as your agent. 

Who are HMRC targeting with Nudge Letters 

In the past we have seen the following areas targeted with nudge letters 

• Overseas assets, income or gains – omissions 

• Annual Tax on Enveloped Dwellings – non-filing 
• Benefit In Kind – omissions 
• Income from Let property – omissions 
• Capital Gains Tax (CGT) – residential property  
• Investment income – omissions 

• Outstanding Self-Assessment tax returns 

HMRC are continuously extending their use of nudge letters and we have seen them start to target the following areas: 

Offshore corporate owning UK property  

HMRC claim they have been reviewing data from HM land registry to identify companies who may need to make disclosures for the non-resident corporate rental income, the annual tax on enveloped dwellings (ATED), the transfer of assets abroad (ToAA) legislation, non-resident capital gains tax and income tax under the transactions in land rules.  

Share disposal omission  

HMRC have been issuing nudge letters to people who are recorded as being ‘Persons of Significant Control’ in unquoted companies. 

According to HMRC, those who receive the letters have disposed of all, or some, of their company’s shareholding in 2020/21, but have not recorded any such disposals on their tax return for that year. 

Rollover relief claims on residential letting sales 

HMRC have issued nudge letters to those who claimed rollover relief under s.152 TCGA 1992 for residential rental properties. The relief can only be claimed for residential properties in very limited circumstances, and those contacted will have claimed the relief on such properties in their 2020/21 tax returns 

Research and Development 

Companies working on innovative projects in science and technology may be able to claim Corporation Tax relief if their work meets the Government’s definition of Research and Development (R&D). Nudge letters received from HMRC urge claimants to clarify whether their activity actually qualifies for tax relief, drawing attention to the BEIS definition of R&D which is much stricter than the commercial or engineering definition. In practice, compliance checks can uncover claims that don’t fall within the BEIS criteria, triggering HMRC to send out nudge letters. 

Further action 

If you have received a nudge letter relating to the above, or in relation to any other issue, and require expert advice and assistance, please get in touch

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Further reading on nudge letters

The Night Before Christmas

Nudge Letters and Worldwide Disclosure Facility FAQ