HMRC 'nudge' letters

HMRC is aware that many people have bought and sold cryptoassets without being aware of – or choosing to ignore – the tax implications on any capital gains or trading income.  It took HMRC and other tax authorities around the world a few years to start to catch up but now platforms that provide cryptoasset services around the world must collect data and report it to HMRC under the Cryptoasset Reporting Framework (“CARF”).  HMRC also has historic data from providers like Coinbase obtained through information notices.

As confirmed by a Freedom of Information Request submitted by Brokerchooser, between 2020 and 2025 a total of 101,024 nudge letters were issued relating to potential capital gains tax due on cryptoasset disposals.

HMRC is showing a continuing and deepening interest in relief claims and tax incentives where the underlying technical position is fact-sensitive or where claims may have been made too optimistically. In recent years, this has included a focus on R&D relief claims, an area which has recently been dogged by a high level of bad advice and poor compliance and has been a major contributor to the “tax gap”. A purpose-built R&D voluntary disclosure service was launched in December 2024.

For owner-managed businesses, common themes include company loans, director remuneration, dividends, benefits in kind and other transactions involving shareholders or persons of significant control.  HMRC checks data to Companies House, and we know that as part of a larger exercise they HMRC are rapidly improve their data reconciliation work.  Moreover, from 2025/26 personal tax returns onwards, HMRC are requesting further details from directors/shareholders of close companies on the employment pages of their Self Assessment Returns.  We expect this to be an ever growing area of HMRC focus.

Payroll, employment and contractor compliance now generate regular campaigns. Here, the issues may include employment status, off-payroll working, benefits, pay and tax, and whether workers have been treated correctly in the first place – as well as whether the rules of the Construction Industry Scheme have been correctly applied.

VAT is an increasingly live area, particularly where HMRC suspects that a business may have crossed the registration threshold, adopted the wrong treatment, or failed to account properly for taxable supplies. As with other campaigns, the letters are commonly driven by data and pattern recognition rather than by a clear finding that tax has been underpaid.

Finally, some nudge letters are aimed more squarely at fraud, hidden income and other undeclared sources of profit or gains. That can include online platform sellers (eBay, Etsy, Vinted, AirBnB) which now have to share sales data and personal information with HMRC if there has been more than a small number of transactions.  In the past, campaigns have also targeted sectors such as dog breeders – identified through data from sources such as insurers and the RSPCA – and suspected self-employed gas fitters identified through their CORGI registration.  As the last two examples illustrate, HMRC is becoming increasingly clever and imaginative in its use of third party information that might point to undisclosed income streams.

Sometimes it is not immediately clear cut either to taxpayers or to HMRC whether any offshore related tax liabilities actually exist.  This is particularly the case where taxpayers might not have been UK resident and/or UK domiciled for UK tax purposes.

Non-UK residents do not have to report their overseas income in the UK. Whereas UK residents are subject to tax in the UK on their worldwide income, subject also to the “non-dom” rules and related considerations such as what they remitted to the UK and whether they claimed the “remittance basis” of UK tax.

Quite a common misconception amongst taxpayers is that overseas income and gains are not reportable in the UK and many UK residents fall foul of the rules. Upon moving to the UK a thorough review should be carried out.  However, this is often overlooked.

UK tax residence is a complex area and often requires professional assistance. We have set out the details of the Statutory Residency Test in our article on the topic. Please note, where taxpayers are internationally mobile, then an in depth review is particularly advisable.

In addition to the tax underpaid and late payment interest, penalties may also be applicable.  Penalties are levied as a percentage of the tax underpaid – known as the “potential lost revenue” (PLR) and can vary from nil to 200% or more depending on:

• the “behaviour” that gave rise to the inaccuracy or failure;
• how much the person helped to establish the correct amount of tax due as part of the disclosure or investigation;
• the circumstances which may have caused the failure or inaccuracy and whether there was a “reasonable excuse”;
• the overseas territory or territories involved;
• how long taxpayer has been non-compliant;
• whether a legal “requirement to correct” was missed in respect of any older liabilities due by 6 April 2017.

A HMRC nudge letter is the informal name for what HMRC officially call a “one-to-many letter”.

These are letters sent to multiple taxpayers as part of HMRC campaigns and projects targeting particular types of non-compliance.  The letters are typically automatically generated by HMRC’s systems where its computer analytics have spotted a potential discrepancy or higher risk involving the taxpayer concerned.

The letters do not mean that HMRC necessarily has certain knowledge of non-compliance but they are designed to encourage taxpayers to review their position, take professional advice as appropriate and correct matters voluntarily if needed.

No. HMRC’s One to Many/nudge letters are not in themselves a form of HMRC investigation or compliance check nor are they a form of enforceable HMRC information notice.

HMRC lacks sufficient resource to investigate every taxpayer their systems suggest might not be tax compliant, so the letters are designed to conserve the use of HMRC resources by giving taxpayers the opportunity to review their own positions and voluntarily come forward as required.

No, not necessarily. A nudge letter usually means HMRC holds information which suggests there may be an omission or inaccuracy which you may have to pay tax. HMRC will normally keep an open mind about how an omission or inaccuracy may have arisen.

Yes. The timescale depends upon the type of letter and the HMRC team involved but follow up letters can normally be expected once an initial nudge letter has gone unanswered for 30 days or more. The follow up letter is normally more strongly worded and is more explicit about the likelihood of HMRC opening an investigation and the adverse consequences that might follow.

HMRC typically stipulate that taxpayers have up to 30 days to respond to either confirm that their tax affairs are in order or that they are going to make a voluntary disclosure to make good any underpayment. However, responding within the initial requested timescale is not an enforceable legal requirement and HMRC are typically reasonable in accepting more time for a response – to for example, appoint an adviser.

The most important thing, in order to address the risk of escalation to a possible investigation is to contact HMRC within the initial timeframe to acknowledge the nudge letter and explain the steps being taken to respond to it.

Typically, nudge letters ask taxpayers to provide a statement to HMRC that they are fully tax compliant or else to make full voluntary disclosure of any irregularities. Nobody should do either without being completely certain of the position.

Often, oversights have occurred because of the failure to previously seek professional advice or to provide advisers with all relevant information. Not seeking professional advice after receiving a nudge letter risks compounding the situation.

A specialist adviser can review and confirm what historic oversights may have occurred and either explain to HMRC why no disclosure is required or help the taxpayer to make a full voluntary disclosure to mitigate the situation. As well as calculating the amount of additional tax payable – which can vary in technical complexity – it is also necessary to understand the assessment and penalty legislation and case law which determines how many years HMRC are still in time to assess and the level of penalties that may be at point.

Yes.  As such, it will slightly raise the minimum level of penalties. However, cooperating and making a full disclosure – even if prompted – will still significantly mitigate the penalty position compared to waiting for HMRC to actively investigate the matter.

HMRC will likely follow up threatening escalation and, ultimately, if necessary, can be expected to open a formal compliance check. If there is an underlying tax error, ignoring the letter may also reduce the scope for a more favourable penalty outcome, because HMRC usually gives lower penalties where taxpayers come forward before matters escalate.

In serious cases of deliberately undisclosed tax, HMRC may consider criminal investigation with a view to criminal prosecution and securing a custodial sentence.