The approach can take any number of guises including emails, SMS texting, digital channels or media advertising campaigns. Given that it would not be efficient or effective for HMRC to carry out a formal one-to-one approach with every taxpayer, the OTM approach allows for a broad stroke approach to give large groups of recipients a ‘nudge’ to check that their affairs are in order. In the last number of years, HMRC’s use of the OTM approach has become more prevalent.
Included within the OTM approach is the ‘nudge letter’. These are letters issued to groups of taxpayers that HMRC have identified using data available which suggests that their tax affairs may be incorrect. The letters have no statutory foundation and are intended to provide an informal route to prompt corrections in a taxpayer’s affairs. Nudge letters issued to date have covered a wide variety of topics, some are revisited annually and some more complex areas have been the subject of numerous different letters.
It would be incorrect to think that nudge letters are simply computer generated letters issued randomly. HMRC will have identified a real tax risk that could apply to a multitude of taxpayers and gone through a rigorous process to consider if the OTM approach is suitable and how it can best be applied. HMRC’s Compliance Handbook (which is publicly available) provides HMRC officers with detailed guidance on the OTM approach and the process required for it to be applied. It assists officers in determining the various factors that should be considered (e.g. cost/benefit analysis, impact on other HMRC strategies, reputational risk for the organisation) and what medium may be appropriate.
In many cases, there is no need to panic if a nudge letter is received. Despite HMRC’s best efforts, innocent taxpayers can often be caught in the net and it can be the case for some that the letters are entirely unfounded and no changes are required.
However, nudge letters should always be checked in detail in the event of a mistake existing in the recipient’s affairs. The letter will explain the technical points which HMRC believe the recipient may have fallen foul of and any information or guidance referred to should be considered. HMRC may ask for a reply to the letter within 30 days and will state that if no reply is received, a follow up may occur. As mentioned, these letters are not provided for within the legislative framework provided for formal enquiries and responding to them may lead taxpayers into an ambiguous position. Careful consideration should be given to what response (if any) is required. If nothing is out of place, it may be worth explaining this to HMRC to avoid further queries or misunderstanding. However, if an error is discovered, coming forward even after receiving a nudge letter may be beneficial. Ignoring or failing to identify and disclose errors which the nudge letter is targeted at will not be helpful in the event of an enquiry.
Some nudge letters have included a 'Certificate of tax position to be completed and returned to HMRC'. The certificate asks the taxpayer to confirm if their affairs are correct and complete or not and includes a statement which notes that dishonestly making a false statement in order to evade paying tax is a criminal offence. There is no obligation to make this declaration and HMRC cannot demand a response to it. If the declaration is made and later found to be incorrect, this could impact penalty negotiations and even result in criminal prosecution. It is unlikely that signing the declaration would be beneficial for any taxpayer.
Nudge letters should be taken seriously as they highlight potential risks within the taxpayer’s affairs which, if not set straight, could result in additional tax, interest and penalties. It is therefore strongly recommended that appropriate advice should be sought upon receiving a nudge letter. A review of the points highlighted in the letter should be carried out and if it is the case that nothing is out of place, no further action may be necessary. However, in some cases, letters may justify a written response to HMRC to confirm that details are updated/clarified for their records. Errors discovered should be corrected in a timely manner.
This relatively new tactic by HMRC should not be a surprise. HMRC have been using behavioural insights since 2000 and the nudge letter is currently considered the best approach in some cases to cope with the sheer number of potential cases being identified. Given the acceleration in use of nudge letters in recent years, it may be safe to assume that they are leading to some success and we expect to see continued use of them in cases where a common issue can be shown as potentially applying to many taxpayers. We will have to wait to see what impact further automation of processing and the development of artificial intelligence may have on HMRC’s compliance processes.