One of the methods HMRC uses to encourage tax compliance is the use of nudge letters for overseas income and gains. These are issued where HMRC have received information from an overseas tax authority or financial institution that they do not believe has been reported in the UK.
Receiving a letter does not necessarily mean that the taxpayer has made a mistake or that their tax affairs are incorrect. However, the nudge letter should not be ignored.
This guide explains what HMRC nudge letters for overseas income are, why they may have been issued, and what steps must be taken to respond to the letter.
We recommend that professional advice is obtained to review and respond to the HMRC nudge letter, and if you would like to discuss further, please contact Expat Tax Solutions.
What Does An HMRC Nudge Letter For Overseas Income and Gains Look Like
An HMRC nudge letter for overseas income and gains is commonly sent by the VCSO Volume Compliance Offshore Team and will typically contain wording along the following lines:
Dear Sir/Madam
Your overseas assets, income or gains.
We have information that shows you may have received overseas income or gains that you may have to pay UK tax on.
We’ve received this information through the UK’s tax information exchange agreements with other countries.
We’ve compared the information with your tax record and tax returns. We believe that you may not have paid the amount of UK tax, and we want to help you get this right. We’re giving you the opportunity to review your tax affairs and to tell us about anything that you may need to put right.
Some people with assets overseas have found that earlier tax advice is out of date after changes to their personal circumstances or to tax laws.
What you need to do
Please:
Check you’ve told us about all your UK tax liabilities from all income or gains.
Fill in the enclosed certificate and send it to us by <client specific deadline>.
The nudge letter will generally not provide details of the specific information HMRC has received. The taxpayer is therefore expected to review their own records to establish whether there is an issue. Where necessary, HMRC may be contacted for further information.
A copy of an example letter can be found on the CIOT’s website here.
Why Has HMRC Sent Me a Nudge Letter?
HMRC send nudge letters to individuals who HMRC believe may have undeclared foreign income or gains. This is typically because HMRC have received information from a foreign tax authority or financial institution including as a result of the Common Reporting Standard (CRS), and this does not align to the individual’s UK tax affairs.
HMRC uses a risk-based approach when issuing these nudge letters. They are generally issued where information received from overseas sources cannot readily be reconciled with the taxpayer’s UK tax records or tax returns.
HMRC’s goals of the nudge letters are to:
- nudge or prompt taxpayers to review their tax returns to check that they are complete and correct;
- encourage those who need to rectify mistakes to make voluntary disclosures to HMRC;
- encourage all recipients to update HMRC on whether their tax position is up to date to enable HMRC to efficiently follow up on the letters as needed.
There are many completely compliant reasons why an individual may have not declared the foreign income. For example, the income may have been received in a year of UK tax non-residence or there may be a difference between the amount reported by an overseas financial institution and the amount that is actually taxable in the UK. The information provided by the overseas authority may also relate to a calendar year and therefore not be reportable in the UK tax year.
For example: an overseas financial institution may report interest or investment information covering January to December, whereas the UK tax return covers 6 April to 5 April. The figures therefore may not correspond directly even where the taxpayer has correctly reported their income in the UK.
HMRC’s information is not necessarily complete or error-free. If you believe the information HMRC has relied upon is incorrect, this should be explained in your response rather than assuming that the figures supplied by HMRC are necessarily accurate.
Alternatively, the individual may have mistakenly not reported the income or may have received incorrect or out of date advice in which case their tax affairs need bringing up to date.
In any case, the nudge letter should not be ignored. The taxpayer should review their position and respond to HMRC by the deadline stated in the letter.
The way in which the nudge letter should be handled will depend on the circumstances of the individual and what they have to declare. An incorrect or incomplete response may result in HMRC taking further action, potentially including an enquiry or investigation. It is therefore important to understand the taxpayer’s position before responding.
What To Do If You Receive an HMRC Nudge Letter For Overseas Income
If you receive an HMRC nudge letter for overseas income, we recommend that you engage with a professional advisor who should take the following steps:
- Authorise your tax adviser to act on your behalf. This allows the adviser to communicate with HMRC about your tax affairs and deal with the nudge letter on your behalf.
- Determine the nature and source of overseas income or gains that has prompted the letter. HMRC can provide further information if the taxpayer is not aware of the foreign income or gains.
- Assess whether the income or gains need to be reported or are taxable in the UK. This will usually involve a UK tax residence assessment or analysis of a Double Taxation Agreement.
- Respond to the nudge letter. Depending on the outcome of the review, this may involve explaining why the income or gains do not need to be reported or are not taxable in the UK, confirming that the tax position has already been correctly reported, or making a disclosure, amendment or Self Assessment tax return where appropriate.
The Certificate of Tax Position
All of the HMRC nudge letters for overseas income include a ‘certificate of tax position’ that they ask the taxpayer to complete.
This requests that the individual select one of the following four options and make a declaration that the information they provide on the certificate will be “correct and complete to the best of their knowledge and belief”.
- I need to bring my tax affairs up to date. I will declare all my outstanding UK tax using HMRC’s Worldwide Disclosure Facility.
- I believe I have declared all my overseas income and/or gains correctly on my tax return(s) as shown below.
- I have not declared my overseas income and/or gains as they are covered by personal allowances or reliefs.
- I have not declared my overseas income and/or gains as they are not liable to UK tax.
The certificate should therefore not be treated as a simple administrative form. By signing it, the taxpayer is making a declaration about the completeness and accuracy of their tax position. It is important to establish the correct tax position before making any declaration to HMRC.
The CIOT and HMRC have discussed these certificates and confirmed:
- there is no legal obligation for the individual to complete and return the certificate
- it is likely to be preferable to respond in writing particularly where the taxpayer has complex tax affairs or where none of the options accurately explains their position. This this will enable more detailed explanations to be provided to HMRC.
- HMRC will accept a response by letter as an alternative should an individual choose not to complete the declaration.
We therefore do not typically recommend that the certificate is completed, and instead that the nudge letter is responded to in writing or via a disclosure if income needs reporting.
It is also important to note that the certificate is not limited to the particular income or gains referred to in HMRC’s letter and may cover your wider tax affairs for relevant tax years.
HMRC Nudge Letters For Overseas Income and Gains FAQs
What is an HMRC nudge letter for overseas income or gains?
An HMRC nudge letter for overseas income or gains is designed to prompt taxpayers to review their historic records and confirm whether they have any unreported overseas income or gains that need to be declared in the UK. HMRC may issue these letters where information it has received from overseas tax authorities or financial institutions suggests that there may be overseas income or gains that have not been reported.
Do I need to respond to an HMRC nudge letter for overseas income or gains?
A HMRC nudge letter should not be ignored. While a nudge letter is not the same as a formal HMRC information notice, HMRC expects taxpayers to review their position and respond by the deadline given in the letter. Failure to respond may result in HMRC taking further action, which could include opening an enquiry or investigation.
Should I complete the certificate of tax position?
We do not typically recommend completing the certificate of tax position without first reviewing the taxpayer’s circumstances in detail. The nudge letter should nevertheless be responded to, and we commonly recommend responding in writing so that the taxpayer’s position can be explained to HMRC in more detail.
The certificate contains a number of declarations about the taxpayer’s tax position, so it is important to understand exactly what is being confirmed before signing and returning it.
What if I have unreported income that I need to declare?
The unreported income or gains should be disclosed to HMRC using the appropriate disclosure route. Depending on the circumstances, this may involve an amendment to a Self Assessment tax return, submission of a Self Assessment tax return, or a disclosure under the Worldwide Disclosure Facility. We also recommend responding to the nudge letter separately to confirm that a disclosure is being considered or will follow.
What if I have already declared my overseas income or gains?
If you have already correctly reported the overseas income or gains referred to in the letter, you should review your tax returns and records carefully to establish why HMRC’s information appears to differ from your tax position. You should then respond to HMRC explaining the position and provide supporting information where appropriate.
How long do I have to respond to an HMRC nudge letter for overseas income?
HMRC will typically give you 30 days from the date of the letter to respond. However, the deadline can vary, so you should check the specific deadline stated in your nudge letter.
Does receiving an HMRC nudge letter mean I am being investigated?
Receiving a nudge letter does not necessarily mean that HMRC has opened a formal tax enquiry or investigation. Nudge letters are generally intended to encourage taxpayers to review and, where necessary, correct their tax position before HMRC takes more formal action.
Did I do something wrong if I receive an HMRC nudge letter for overseas income?
Not necessarily. HMRC uses a risk-based approach when issuing nudge letters. The letter may indicate that HMRC has received information from an overseas tax authority, financial institution or another source that does not appear to align with the individual’s UK tax records. However, there may be a completely legitimate and compliant explanation for the apparent discrepancy.
Will HMRC charge me penalties and interest?
If you have unreported overseas income or gains that result in an additional UK tax liability, HMRC may charge interest and penalties. Interest is generally payable from the date the tax was originally due.
The level of any penalty will depend on a number of factors, including the taxpayer’s behaviour and the circumstances of the disclosure. Penalties can therefore vary significantly between cases.
Can I get professional help responding to an HMRC nudge letter?
Yes. An HMRC nudge letter should be considered carefully before responding, particularly where it relates to historic overseas income or gains. We can review your UK tax position, establish whether any income or gains have been omitted, advise on the appropriate disclosure route and assist with preparing a response to HMRC.