HMRC has been and will continue to increasing its use of ‘nudge letters’ to encourage taxpayers to check their tax affairs and correct any errors. If you receive one, it’s important to understand what it means and how to respond appropriately.
What are HMRC nudge letters?
Nudge letters are issued by HMRC when they believe there may be discrepancies in a taxpayer’s reported income or tax liabilities. These letters are not formal investigations, but they serve as a warning that HMRC has access to data suggesting a potential issue.
Unlike full tax enquiries, nudge letters encourage voluntary disclosure and are often the result of data-sharing agreements with third parties, such as overseas tax authorities, banks, and online platforms.
Why might you receive a nudge letter?
HMRC issues these letters for various reasons, including:
- Overseas income and assets – If you have income from foreign investments or property, HMRC may suspect undeclared tax liabilities.
- Cryptocurrency transactions – Gains from cryptocurrency trading are taxable, and HMRC now collects data from exchanges.
- Property income – Landlords, particularly those renting via platforms like Airbnb, may receive nudge letters regarding undeclared rental income.
- Dividend income – If declared dividends don’t match company records, HMRC may reach out.
- Employment benefits – Company cars, private medical insurance, or other benefits-in-kind that are underreported can trigger nudge letters.
Where HMRC gets data about your income
HMRC has access to data from a variety of sources, meaning they can track and compare your income across different platforms. Here are some key sources:
- UK Banks & Building Societies – Interest earned on savings and investments is reported to HMRC.
- Foreign Tax Authorities – Under the Common Reporting Standard (CRS), overseas banks and financial institutions share data with HMRC.
- Online Platforms & Marketplaces – Platforms like Airbnb, eBay, and Etsy report seller earnings to HMRC.
- Land Registry & Letting Agents – HMRC can track property transactions and rental income.
- Cryptocurrency Exchanges – Many crypto platforms are required to provide transaction data.
- Companies House & Dividend Records – If you receive dividends from a business, HMRC can verify them against company records.
- DVLA (Vehicle Records) – If you own high-value vehicles, HMRC may compare this to your declared income.
How to respond to an HMRC nudge letter
If you receive a nudge letter, follow these steps to handle it correctly:
- Don’t ignore it! Even though it’s not a formal investigation, ignoring it could lead to a full tax enquiry.
- Check your tax returns (or ask your accountant to): Review the tax years mentioned in the letter and compare them against your records. Ensure all income and gains have been correctly declared.
- Seek professional advice: tax matters can be complex. Consulting a professional can help determine if action is required and how best to respond.
- Decide if you need to make a disclosure: If your tax affairs are correct, you may not need to take any action, but keep a record of your checks. If errors are found, you should make a voluntary disclosure through HMRC’s Worldwide Disclosure Facility (for offshore matters) or the Digital Disclosure Service.
- Respond to HMRC (If Required): Some nudge letters ask for a written response. If replying, be factual and concise. If you’re uncertain about the wording, seek professional guidance.
- Be aware of penalties: If HMRC finds unpaid tax, penalties may apply. However, voluntary disclosure usually results in lower penalties compared to an HMRC-led investigation.
Protect yourself against unexpected HMRC enquiries
We cannot stress enough how much we recommend taking out fee protection for tax enquiries. Even if your tax affairs are in order, receiving a letter from HMRC can be stressful, time-consuming and costly. That’s why we recommend considering our Fee Protection Service, which covers the costs of professional representation in case of an HMRC enquiry.
Given HMRC’s increasing use of data to target taxpayers, it’s more important than ever to have peace of mind knowing that you’re covered should an enquiry arise.
If you’d like to discuss your options or need support with a nudge letter, get in touch with us today via prosper@sbca.co.uk.
You can check if a letter from HMRC is genuine here: Check if a letter you’ve received from HMRC is genuine – GOV.UK