Insights

HMRC has been using nudge letters to prod taxpayers who they believe could have either underpaid tax or made a mistake on their tax returns. If you get a nudge letter it doesn’t mean you have a problem, but if you do and you fail to respond, it could have implications if an anomaly is found later.

The latest group of people to be targeted are ‘persons with significant control’ (PSCs) in a company’ who are registered with Companies House and who either declared an income of less than £100,000 on their last tax return, or who haven’t previously submitted a tax return.

A PSC is defined by HMRC as a taxpayer who meets the following criteria:

• holds (directly or indirectly) at least 25% of the shares or voting rights in a company;
• has the right to appoint or remove most of the directors of the company;
• has significant influence or control over the company.

The people who are being targeted with this latest round of nudge letters have either declared an income of under £100,000 in their most recent tax return (Group 1) or have not yet submitted a self-assessment tax return (Group 2).

Nudge letter recipients – Group 1

According to HMRC, the reason why this group is being approached is because they are considered to have a “lower than expected level of income on their tax return compared to other people in a similar position”. Perhaps this is based on profiling according to geographical location although no information is available about what other information has informed HMRC’s decision.

The reason this is significant is because for tax planning purposes, many taxpayers will actively maintain an income below £100,000 to retain their personal allowance and avoid the 60% marginal rate. Surplus income is generally invested into a pension or left in the company as retained profits where it is tax efficient to do so. This is a very common tax planning strategy for company shareholders, so people may receive nudge letters and become alarmed when there is no need to be.

The nudge letters being issued as part of this campaign ask the recipient to check their 2021/22 tax return for any benefits or gains which should have been declared. For example, these could be:

• Personal use of business assets e.g. company vehicle;
• Asset transfers between the company and individual;
• Loans to directors;
• Share options granted;
• Company share disposals.

If an anomaly is found and a correction needed, HMRC has requested this be completed by 18 August 2023.

Nudge letter recipients – Group 2

The second group of PSCs receiving nudge letters are taxpayers who have not submitted a self assessment tax return to HMRC. HMRC’s practice has traditionally been to ask all company directors to submit a self assessment tax return, even if the individual only receives a modest salary and dividend payment.

The letters invite taxpayers to use an online tool on gov.uk to check if a self assessment tax return is required. Being a company director doesn’t automatically mean you would need to submit a self assessment tax return, unless you receive dividend income of more than £10,000. If a tax return is required, you would need to register for self assessment and submit the tax return for 2021/22 by 18 August 2023.

If you have received a nudge letter from HMRC querying your tax affairs and would like advice from us, please email partners@rjp.co.uk.