What’s going on, and how should you respond?

HMRC’s Connect computer system collects data from public and private sources, which HMRC uses as the basis for sending out letters making taxpayers aware that it has evidence that the recipient’s tax position may be incorrect.

This is the ‘nudge’ approach. It makes recipients aware of problems, providing the chance to correct errors without the expense and stress of formal enquiries. It also enables ‘innocent’ taxpayers to confirm that their affairs are in order easily.

Unfortunately, HMRC has not stopped there with this otherwise sensible approach. Recent standard letters include long lists of questions, implying serious consequences for non-compliance. For example, an IR35 letter asks engagers and their contractors over 50 questions about the nature of their relationship. Other letters suggest that individuals may have overseas income they haven’t declared and even that tenants may have an obligation to deduct tax from rent paid, and requests detailed information about foreign companies and trusts about which the tenant may know nothing.

This approach creates a number of issues, in particular what is the status of the information request?

Unless HMRC raises a formal enquiry, statutory rights are not engaged, so informal requests can allow HMRC to bypass taxpayer rights when asking questions. What responsibilities does the recipient have to third parties? If an engager provides HMRC with detailed information about a contractor, does it risk breaching GDPR and data protection legislation?

The form of the letters is also often problematic. A letter from HMRC saying that a tenant may have an obligation to pay tax to HMRC on rental payments could cause considerable unnecessary distress.

In many cases, the letters includes a statement for the taxpayer to sign confirming that their affairs are up to date. Completing this could turn an innocent error into deliberate tax evasion if it later emerges that a detail has accidentally been forgotten.

So what should you do if you receive one of these letters?

Firstly, don’t panic (unless you’ve got something to hide!). Until HMRC can be persuaded to change its approach, recipients of nudge letters will need to decide how to respond. Highlighting anomalies in HMRC’s data can improve compliance and avoid enquiries and investigations.

The best approach is to use the letter to think about whether you may have a problem, and to respond either by making a disclosure in an organised way, or by confirming that to the best of your knowledge and belief, no action is required. There is no excuse for encouraging taxpayers to sign legally binding statements with no explanation of the possible consequences, so we advise that you do not sign these statements but rather write to HMRC instead.

HMRC does need to be more careful about the content of these letters. It is not appropriate to expect a tenant to turn detective and track down details about who owns the company from which they rent their flat or disclose information about a third party that they may not have permission to do.

And it goes without saying that if in doubt, you should take professional advice before you do anything at all. If you already have a tax agent then they should have received a copy of the letter and will probably be expecting your call.

We have dealt with a number of these letters on behalf of clients and a quick call to check what action you should take is a good strategy. It won’t cost you anything and may alleviate a lot of stress. You can reach me on 01244 660866.