A nudge in the right direction?

19 October 2019

Many businesses and individuals are receiving letters from HMRC requesting detailed information about subjects ranging from rental accommodation to the employment status of contractors. What’s going on, and how should you respond?

A helpful approach

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 ‘nudge’ approach is a good idea. 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.

Misused?

Unfortunately, however, 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. Another letter suggests 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. 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 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 her rental payments could cause considerable unnecessary confusion and distress. In many cases, the letter 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.  

Getting the balance right

So what should be done? Firstly, it is worth repeating that HMRC’s nudge letters approach is a good idea. Highlighting anomalies in HMRC’s data can improve compliance and avoid enquiries and investigations. However, HMRC needs to be more careful about content. 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, and there is no excuse for encouraging taxpayers to sign legally binding statements with no explanation of the possible consequences.

Proceed with care

Until HMRC can be persuaded to change its approach, recipients of nudge letters will need to decide how to respond. The best approach is often to use the letter to think about whether you 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. Finally, it goes without saying that if in doubt, you should take professional advice before you do anything at all.

For more information please get in touch with Andrew Robins.

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