Tax

A Nudge In The Wrong Direction From The UK's Tax Collector?

Harriet Ballard and Matthew Braithwaite 2 November 2021

A Nudge In The Wrong Direction From The UK's Tax Collector?

The authors look at how HM Revenue & Customs sifts through information to chase people who it thinks owe taxes. They find a number of problems, and explain that educating and informing taxpayers is a sensible way forward.

The UK tax authority has, it seems, a growing array of weapons that it can use to collect revenues. One of the latest instruments is called the disarmingly gentle-sounding “Nudge Letter.” To explain how they work and their significance are Harriet Ballard, solicitor and Matthew Braithwaite, partner at Wedlake Bell. The editors at this news service are pleased to share these views; the usual editorial disclaimers apply. To comment, email tom.burroughes@wealthbriefing.com and jackie.bennion@clearviewpublishing.com

There is a wide range of tools in the ever-burgeoning kit bag of HM Revenue & Customs ("HMRC") for it to brandish in pursuit of the tax it believes it is owed. The most recent of which, is the 'Nudge Letter', the practice of issuing a batch of letters to taxpayers who it suspects may be failing to pay the correct amount of UK tax.

HMRC is able to do this through its data matching tool "Connect," cross matching its own data and third-party data (i.e. data gathered under the Common Reporting Standard ("CRS") from other jurisdictions) to ascertain anomalies arising from relationships and patterns between individuals, organisations, and information. However, its ability to distinguish from the more harmless anomalies and those which are more disquieting are not adroit.

One of the issues is that the data gathered through the CRS is prepared on a calendar year basis, unlike HMRC's tax-year calendar; so HMRC cannot easily unify the information received with the taxpayer's return. Consequently, HMRC's interventions, like the Nudge Letter, are often inaptly targeted; ensuing in a steady stream of "Nudges" landing on the doorstep of many taxpayers who have fully declared all their offshore liabilities, often causing confusion and panic amongst the compliant. 

Penalties and traps
The name itself is ostensibly benevolent for something which can be rather alarming for the recipient and understandably so; given that HMRC's Nudges carry with them the potential for hefty penalties if handled incorrectly.
 
A deliberate and concealed inaccuracy ranges from 100 per cent to 200 per cent of the figure HMRC believes to be outstanding, a deliberate but not concealed inaccuracy 70 per cent to 140 per cent and a careless inaccuracy 30 per cent to 60 per cent.

Certificate of tax position
The most sinister component of the Nudge letter, is the “certificate of tax position.” This actively encourages the taxpayer to definitively state whether their affairs are covered by allowance, covered by reliefs, are incorrect, correct, or not liable for UK tax. Yet there is no limit on the timeframe or quantum in relation to the information they are positively affirming. Thus providing an open-ended opportunity for HMRC but a deep pit for the ill-advised taxpayer to fall into. Both inaction and action to these letters can result in disastrous consequences for the taxpayer. The Nudge Letter cannot simply be ignored.  Non-disclosure after receipt of one may be deemed to constitute deliberate misconduct if it can be demonstrated that the taxpayer became aware that a mistake had been made, but made no disclosure of that error.

Action can be just as dangerous. Completing the certificate of tax position is not mandatory, indeed, this is potentially more harmful. A taxpayer who completes and signs the certificate of tax position is warned; that making a false statement is a criminal offence and they can face investigation and criminal prosecution for a false statement. There is an important distinction between the statement that the information provided 'is correct and complete to the best of their knowledge and belief' and the declaration that they understand the consequence of making a false statement. The latter relates to all amounts without any de minimus. 
 

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