Azets: Latest HMRC One to Many letter on inferred distributions: What to do if you receive one?

In HMRC’s latest campaign of its ‘One to Many’ letters (also commonly known as a ‘nudge’ letter), many individuals will soon be receiving the following message in a standard HMRC letter:

Our records show that the accounts for [Registered Name from data file] declared profits of [Net profit from data file].

However, they showed a large drop in the profit and loss reserves for the accounting period ending [Current AP end date from data file]. This normally means shareholders have received a distribution or dividend.

Please check your Self Assessment returns to make sure you’ve declared any income from share distributions and dividends. If you have not done this, you may owe tax.

What should you do?

If you receive this letter – or indeed any other HMRC nudge letter – we recommend that you get in touch with a specialist advisor as soon as possible to discuss it before responding or taking action.

Nudge letters are an example of a behavioural technique employed by HMRC which are designed to ‘nudge’ the recipient to review their tax affairs and voluntarily correct any errors or omissions, in many cases containing instructions on how to do so.

It is important to note that a nudge letter is not a statutory enquiry into a person’s tax affairs, however doing nothing is not an option and appropriate action should be taken. To be clear, this does not mean a person should sign and send the requested certificate to HMRC, as there is no statutory requirement to do so, or simply say there is nothing to disclose without first carefully checking the position. In fact, there are increased risks if you do so.

On the other hand, if HMRC subsequently opens an enquiry and finds an error, failure to take action following receipt of a nudge letter could lead to higher penalties being charged.

If you do find a mistake in your filings, a professional tax advisor can guide you through the disclosure process and advise, where applicable, the penalty mitigation available.

The surge in One to Many letters

Whilst nudge letters are not statutory enquiries, it appears HMRC sees them as a vital cog in its compliance activities and are here to stay for the foreseeable future. This is because in the past HMRC has been criticised for not acting on the information it receives in an effective manner. The use of nudge letters is therefore a cost-effective way for HMRC to communicate or target a substantial number of taxpayers.

A nudge letter will usually say that HMRC holds information on the person (individual, partnership, corporate, trust, etc.) and encourages them to review their tax affairs. However, anecdotal evidence suggests HMRC may have either misinterpreted information or there are inaccuracies in some of the information provided to HMRC.

Disclosures and penalties

If you find a mistake in your filings to HMRC, disclosing the error or omission before HMRC sends a nudge letter or opens an enquiry is more likely to lead to a favourable outcome.

Following receipt of a nudge letter, a disclosure to HMRC will be treated as ‘prompted’ for penalty purposes. Prompted penalty rates are higher than those that apply to unprompted penalties.

Entirely voluntary disclosures to HMRC can benefit from the lowest possible penalty range for the type of error and broadly the length of time interacting with HMRC may be significantly shorter, as compared to a full investigation.

A professional tax advisor can guide a person through the disclosure process and advise, where applicable, the penalty mitigation available.

We are here to help

If you have received a nudge letter from HMRC, please get in touch with your usual Azets advisor or Sajid Ghufoor, National Lead of Azets Tax Investigations and Dispute Resolution team.