HMRC has been sending generic computer generated letters, at random, to nudge taxpayers into reviewing their last tax return without giving them any reason to do so. Adding to the confusion, if the taxpayer has an accountant who acts as their agent, the agent’s copy of the letter doesn’t always specify to which taxpayer it relates.

HMRC uses data from many different sources to cross check information reported on self-assessment tax returns. It is not unusual for these checks to find a mis-match for perfectly innocent reasons. Opening an enquiry every time a mis-match is found is expensive in terms of person-hours, and the time taken to collect any additional tax.

Added to which HMRC is under more strain than at any time I can remember in my career as an accountant. Last week it took them 25 minutes to answer my call to the Agent dedicated line, which usually takes only a couple of minutes. Taxpayers who try to call HMRC at the moment are either being cut off or are giving up.

So, as an alternative to opening an enquiry, HMRC is experimenting with sending a standard letter to taxpayers where their computer finds that the third-party information doesn’t match the tax return. The letter doesn’t state exactly what is missing from the return, but it is supposedly designed to nudge the taxpayer to review and correct the return where necessary. HMRC call these “one to many” letters. 

This approach is light on HMRC manpower as the nudge letter is generated automatically by HMRC’s Connect computer system. The onus is placed on the taxpayer and their tax agent to investigate the issue and take any action required, even though the letter gives no indication about the possible error, if indeed there is one which more often than not there isn't

Unfortunately, where the HMRC letter is copied to the taxpayer’s agent it doesn’t always state to which taxpayer the letter refers, so as agents we cannot even pre-empt a call from our clients to put their minds at rest. Neither does the letter contain a client’s reference, and fails to include any HMRC contact details such as an address or telephone number to which to respond.     

What to do if you receive a ‘nudge letter’

We do not advise ignoring letters from HMRC even ones such as these which are so obviously on a ‘fishing expedition’ and so you should contact your accountant/agent; you cannot assume, even if they have received a copy, that they know it is about you.

It is, of course, extremely frustrating for tax agents, who are working all hours to submit the SA tax returns before the end of January, to break off and deal with such HMRC letters. HMRC must know this and have timed this exercise deliberately. Should the tax agent waste precious time trying to find out which client the letter refers to, wait for the client to contact them or ignore the issue and potentially leave a client with a large penalty for non-compliance?        

Not an enquiry

It is important to note that the HMRC nudge letter does not amount to a formal opening of a tax enquiry. However, nor should you ignore the letter as HMRC may follow-up if the earlier tax return is not amended. 

It is made clear by the HMRC compliance handbook that the whole one-to-many (OTM) approach is an experiment. HMRC officers are instructed to pick a population to target and compare the behaviour of the recipients of the letter to a control group. The success factors for the experiment are listed as:

• increase in profit
• increase in tax paid
• expenses reduced
• the taxpayer’s behaviour has changed (will any action the taxpayer takes be classed as a change in behaviour)?
• increase in registrations
• a taxpayer amends a return
• taxpayer has filed on time due to the approach.

This makes me wonder why correcting a tax return to include additional expenses or to claim a missed allowance, thus reducing the amount of tax due, does not appear to be a positive outcome for HMRC who constantly assert that they want taxpayers to pay the right amount of tax, but apparently not.

If you receive one of these letters but don’t have a tax agent (or you are a bookkeeper one of whose client receives a nudge letter) please give me a call so I can help you out.

Noel Guilford