HMRC enquiries do not always begin with a formal investigation. In many cases, the first contact is a nudge letter based on data already held by HMRC.
These letters should not be dismissed as routine correspondence. Where HMRC writes to a taxpayer suggesting that income, gains or VAT may have been omitted, it is usually because information has already been obtained from third parties, overseas authorities, property records or digital platforms.
(Reading Time: Approx. 6 minutes)
Topics Discussed:
- Seven common areas where HMRC is identifying undeclared income, gains and VAT liabilities.
- Why early disclosure and professional advice can reduce risk, cost and uncertainty.
HMRC Nudge Letters
Many taxpayers assume that HMRC only acts after launching a full investigation. In practice, HMRC increasingly uses data-led compliance activity to identify irregularities and encourage voluntary disclosure before commencing more formal action.
A nudge letter will often state that HMRC has information suggesting that a taxpayer may have undeclared income or gains. The wording may appear broad, but the letter is unlikely to have been issued at random. It normally means that HMRC has received information which does not appear to match the taxpayer’s submitted returns.
This information may come from offshore reporting arrangements, Land Registry data, online marketplace records, delivery platform data, payment processors or other third-party sources. In many cases, the taxpayer is being invited to review their position before HMRC considers further action.
The difficulty is that once a letter has been issued, HMRC will usually expect a response. Ignoring the correspondence, or replying without properly reviewing the position, can create further risk. The better approach is to assess the facts carefully, quantify any exposure and make a controlled disclosure where required.
1. Offshore Bank Interest
Offshore bank interest is one of the most common areas where omissions arise. In many cases, the error is not deliberate. A taxpayer may have moved to the UK, retained a bank account overseas and failed to realise that the interest could still need to be declared on a UK tax return.
This can affect individuals who have overseas savings, inherited funds abroad or bank accounts in a country where they previously lived or worked. Even where the sums involved appear modest, the income still needs to be reviewed from a UK tax perspective.
HMRC receives information about overseas accounts through international data sharing arrangements. This means offshore interest is no longer difficult for HMRC to identify. If a taxpayer is UK tax resident and has received overseas interest, it is important to check whether the income has been correctly reported.
Where historic omissions have occurred, it is usually preferable to make a proactive disclosure rather than wait for HMRC to issue a letter.
2. Rental Income
Rental income remains a major focus for HMRC and has been the subject of long-running compliance activity through the Let Property Campaign.
A common mistake is assuming that rental income does not need to be declared because the property is making little or no profit. Some taxpayers believe that mortgage interest, repairs, service charges or other costs mean there is nothing to report. Others assume that if the rental income is covered by their personal allowance, no declaration is required.
These assumptions can create significant problems. Rental income should be properly reviewed and reported where required, even if the property is not producing a taxable profit. In some cases, declaring the position correctly may establish losses or provide clarity for later years. These matters can often be resolved, but the cost usually increases the longer the position is left uncorrected.
3. Sale of Investment Property
Where a UK residential property is sold and a capital gain arises, the taxpayer must report the gain and pay the capital gains tax within 60 days of completion. This can apply to buy to let properties, second homes and other residential properties that are not fully covered by private residence relief.
HMRC can identify property disposals through Land Registry records, conveyancing data and other third-party information. If a property has been sold and no capital gains tax report has been submitted, HMRC may later ask why.
The fact that a taxpayer intends to include the gain on a self-assessment return does not always resolve the issue, because the 60-day reporting requirement may still have applied. Anyone who has sold an investment property should review whether the disposal was reported correctly and whether any tax was paid on time.
4. Online Sellers
Online sellers are increasingly visible to HMRC. Platforms such as Amazon, eBay, Vinted and other digital marketplaces hold detailed records of sales activity, and HMRC can compare those records with tax returns.
The first issue is whether the income from online sales has been declared. The second, and often more expensive, issue is whether the seller should have registered for VAT.
VAT registration is based on taxable turnover, not profit. This distinction is regularly misunderstood. A seller may believe that because their profit is modest, or because stock and platform fees reduce the amount they keep, VAT registration is not required. That is not how the rules work.
If taxable turnover exceeds the VAT threshold, currently £90,000, VAT registration may be required. Where this has been missed for several years, the VAT arrears, penalties and interest can be substantial. In some cases, the income position may have been declared correctly, but VAT has been overlooked entirely.
5. Uber and the Gig Economy
Gig economy income is another area where HMRC has strong visibility. This includes individuals working through platforms such as Uber, as well as couriers and other platform-based workers.
The flexible nature of the work does not change the tax position. If income is taxable, it must be declared. HMRC can obtain information from platforms and compare reported earnings with the figures included on a tax return.
Problems often arise where the work is part-time, irregular or carried out alongside employment. A taxpayer may assume that because tax is already being deducted from their main job, the platform income is not significant enough to report. That can be incorrect.
Anyone earning through a platform should keep proper records, check whether they need to register for self-assessment and ensure that the figures submitted to HMRC are complete.
6. Food Businesses and Delivery Platforms
Food businesses using platforms such as Uber Eats and Deliveroo are also under close review. Takeaways, restaurants and similar businesses may receive income through several channels, including counter sales, card payments, cash payments and delivery platform receipts.
The main issue we see in this area is again, VAT. A business may exceed the VAT registration threshold through a combination of direct sales and delivery platform turnover, but fail to register on time.
HMRC can access or analyse information from delivery platforms, payment processors and business records. Even if a business does not receive a letter immediately, that does not mean the issue has not been identified or will not be reviewed later.
If VAT registration has been missed, the liabilities can be severe. The business may be required to account for VAT that should have been charged historically, together with interest and potential penalties. For food businesses already operating under pressure, this can create a serious cashflow issue.
7. Property Incorporations
Property incorporation is another area where errors can be particularly costly. This usually involves transferring personally owned property, whether held individually or jointly, into a limited company.
Incorporation may be appropriate in some circumstances, but it should never be undertaken without detailed tax advice. The transfer can trigger capital gains tax and stamp duty land tax, even where no money changes hands. For larger portfolios, the potential liabilities can be substantial.
Some taxpayers have transferred properties into a company after receiving informal advice or assuming that a company structure would automatically be more tax efficient. However, if the transaction is not structured correctly, the tax cost can be far greater than any perceived saving.
HMRC is paying close attention to this area. Anyone who has incorporated property, or is considering doing so, should ensure that the capital gains tax, stamp duty land tax and wider tax consequences have been properly reviewed.
Summary
HMRC’s use of third-party data means that undeclared offshore interest, rental income, property gains, online sales, gig economy earnings, food business turnover and property incorporations are increasingly difficult to ignore.
A nudge letter should be taken seriously, but taxpayers do not need to wait for HMRC to make contact before addressing an issue. Early advice can help quantify the liability, manage the disclosure process and reduce the risk of further penalties.
If any of these seven areas apply to you or your business, contact us to organise a confidential consultation so that we can help you understand your position and agree the right way forward.
Fill out our form here, email us at info@taxexpert.co.uk, or message us on our WhatsApp for out of office hours.
Kind regards,
Ilyas Patel
