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HMRC targets offshore corporates owning UK property in latest round of nudge letters

Posted on 14 October 2022

The Nudge Unit, formerly known as the Behavioural Insights Team, was a team within the Cabinet Office that was tasked with improving government services and saving money by employing a blend of behavioural economics and psychology. In practice, this often meant making small changes to government services to create big changes in public behaviour. An example of this policy in practice are the so-called "nudge" or "one to many" letters HMRC issue on the back of using their vast data collection resources. It is unsurprising that HMRC is frequently more inclined to send these nudge letters to large groups of taxpayers as it places the onus on the taxpayer, not HMRC, to review its historic tax returns. The latest campaign of nudge letters aims to prompt offshore corporates that own UK property into voluntary tax disclosures, in an effort to promote compliance with the UK tax regime. This follows a previous batch of nudge letters being sent to taxpayers questioning perceived discrepancies between P11D data submitted and the benefit-in-kind declaration on their self-assessment tax returns.

What are nudge letters?

Nudge letters are, by design, generic letters sent en masse by HMRC to taxpayers whom HMRC suspect might have done something they currently disagree with. The idea is to prompt taxpayers to review their tax affairs and, if a disclosure needs to be made, provide HMRC with the relevant information to assess or reassess the taxpayer's tax position; HMRC's goal being maximum tax yield for minimum effort.

Nudge letters make sense from HMRC's perspective. But the concept subverts the usual legal maxims by putting taxpayers in positions where they must review their historic tax affairs and satisfy themselves, and, by extension, HMRC, that everything is in order - but without the legal protection of a formal enquiry. Conversely, taxpayers may discover that a disclosure should be made to HMRC in relation to their historic tax affairs. 

In either event, the taxpayer is usually given a short timeframe from the date of HMRC’s letter to respond and/or correct their tax return (if necessary). If an amendment results in extra tax due, that tax will have to be paid promptly, and interest will be charged on "late" paid tax. HMRC may also seek to charge penalties calculated as a percentage of the additional tax due. 

A nudge to review offshore planning

Following a review of CRS and Land Registry data, HMRC has issued one of two letters, depending on the circumstances, alongside a Certificate of Tax Position. The letters are addressed to offshore corporates but urge connected UK-resident individuals to confirm that their personal domestic tax affairs are compliant with anti-avoidance provisions.

Of the two letters, one has been issued to non-resident companies that HMRC suspects either need to disclose income received as a non-resident landlord, now subject to corporation tax, or are non-compliant with the Annual Tax on Enveloped Dwellings ("ATED"). Companies are caught by the ATED regime if they have property in the UK that was valued at more than:

  • £2 million (for returns from 2013 to 2014 onwards);
  • £1 million (for returns from 2015 to 2016 onwards);
  • £500,000 (for returns from 2016 to 2017 onwards).

The letter suggests that connected UK resident individuals should seek professional advice regarding the applicability of the Transfer of Assets Abroad legislation and to ensure that their tax affairs are up to date.

The second letter has been sent to offshore corporates that HMRC considers to have made a disposal of UK residential property between 6 April 2015 and 5 April 2019, without filing a Non-Resident Capital Gains Tax return.

What should you do if you have received a nudge letter?

If you have received a nudge letter, inaction can be perilous. Failing to respond promptly will undoubtedly lead to follow up questions by HMRC and may also lead to harsher penalties in the long-term if a disclosure should be made and more tax is payable as a result.

Therefore, should you receive a nudge letter, we suggest that:

  • You review your historic tax affairs as soon as possible thereafter. Tax laws are complex and we would, therefore, be happy to assist with this review;
  • If there is nothing to correct, a response can be sent to HMRC confirming this. This is a preferable course of action to completing any Certificate of Tax Position which may accompany a nudge letter. There is no legal obligation to complete the certificate and it may lead to unforeseen problems. Accordingly, an appropriately worded letter should suffice;
  • If there is a disclosure to be made, it is important that it is made correctly and completely. By taking a proactive approach you can assert more control over the process and narrative. You may also limit or eliminate potential penalties in the long term. Again, this is something we would be happy to assist with and have significant expertise in doing so.

For the reasons set out above, should you find yourself subject to a nudge letter, whether in relation to offshore planning or any other matter, it is important that you act quickly to respond. To that end, please do not hesitate to contact a member of our Tax Disputes & Investigations Team for assistance.

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