HMRC nudge letters for overseas income - and what do I need to do if I receive one?

More and more people are receiving HMRC nudge letters asking them to disclose overseas income to the Worldwide Disclosure Facility (WDF) team.

An HMRC nudge letter is not a demand or obligation to pay any additional taxes, it’s simply facilitating your opportunity to speak to HMRC and to find out what information they have. Effectively it is a letter which is ‘nudging you’ into compliance, hence why they are commonly known as "HMRC nudge letters"

If you receive one of these letters, there’s no need to start losing sleep over it. The best thing to do is speak to a professional such as Laurence Hodgens of Hodgens Global, an International Tax Advisor for UK expats.

We spoke with Laurence about what HMRC nudge letters mean for expats, what they should do if they receive one and how to avoid getting a nudge letter in the first place.

What is an HMRC nudge letter and why are people getting them?

Currently, lots of expats all over the world are receiving these nudge letters, saying that HMRC understands they have foreign income that's not been declared in their tax returns.

Most commonly, this seems to be happening to individuals who used to live in continental Europe and are now living in the UK. They might be receiving rental income, trust income, or bank interest that's not been declared in their tax returns.

In many cases, the expats I am speaking with have been filing tax returns declaring their UK employment income as well as other UK sources of income, but they aren’t aware that foreign income also needs to be declared.

Everyone in the UK is normally assessed for tax on income as it arises. However, expats living in the UK for the first time can, under the existing tax regime, apply the remittance basis of taxation. This means if they have overseas income that's not remitted to the UK, they can exclude it from the UK tax return by ticking the appropriate boxes to say they're applying the remittance basis of taxation.

A lot of expats living in the UK are under the impression that if income has been taxed in their home country, it doesn't need to be declared in the UK. But this is not the case.

Many of these people are higher rate taxpayers, paying tax at a rate of 40%-45%. Therefore, any overseas income will also need be taxed at the same rate. If that income is coming from a country where it has been taxed at lower rate, for example 20%, then there is a surplus of tax to be paid to HMRC.

Right now, HMRC is being very resourceful. They are checking that the information they're getting from overseas banks and tax offices corresponds with what’s on people’s tax returns. If they spot overseas income that has not been declared in a tax return, they will investigate whether there is additional tax to pay. 

If HMRC makes the discovery rather than having the information supplied voluntarily, the law allows them to take additional revenue in the form of penalties and late payment charges – which means this can be quite a money earner for them.

Additionally, there are people receiving these letters who have left the UK. HMRC will contact them, even though they are no longer in the country, because they haven't declared income they received when they lived in the UK. It can be quite a shock for them to receive such a letter when they thought HMRC and UK Tax was something they no longer had to deal with.

Can I ignore an HMRC nudge letter?

As pursuing these letters can be lucrative for HMRC, if you ignore a letter from them, it is likely that it will continue to haunt you. I recently spoke with someone who had received a letter like this two years ago, and he has still not dealt with it, which has made the situation much worse as his circumstances are quite complex.

It’s likely that the worst that is going to happen to you is a fine, and that continuing to ignore the letter would mean the penalties get worse. In my experience, the penalty is likely to be 100% of the tax bill due with late payment charges issued on top of that. And if ignored over years, that can build up. 

When a client comes to me with one of these letters, I recommend that they phone HMRC, ask for an extension of the deadline and advise that they are working with a tax agent such as myself to clarify and resolve the issue.

I also advise people not to start speculating on what information HMRC has, but to ask them directly what specific information they are referring to and from what year. Usually, we discover that the information is from previous tax years.

Ultimately, it’s always best to come clean and do whatever it takes to make your declarations as complete as possible.

How to respond to an HMRC nudge letter

When UK expats living abroad receive a letter like this, in many cases the issue will be that HMRC doesn’t understand they’re a non-UK resident and their status simply needs updating. In these cases, expats can easily resolve the situation themselves and I will give them some starting points for their conversation with HMRC.

More complex matters will likely require the support of a tax agent such as myself. When a tax professional is involved, the process can almost always be resolved smoothly within the deadline.

Most expats also find it helpful to work with someone who can handle all conversations with HMRC as the process can be intimidating, especially if English is not their first language. If they say the wrong thing, it’s potentially open to misinterpretation which can escalate the problem.

When I deal with HMRC on behalf of clients, I am usually able to handle the matter completely and get a resolution. Sometimes clients will try and do it themselves, but it can be a mammoth task so I would always recommend seeking professional help.

What should people be doing to avoid receiving an nudge letter?

I’ve been an expat for more than 30 years and no matter which country I am living in, the first thing I seek to understand is the tax reporting obligation that falls on anyone who lives in that country.

Never make any assumptions when it comes to tax. Do not assume that because tax is paid in one country, it doesn't need to be declared in the country where you live. I would always recommend speaking with a tax advisor as a first port of call.

Many years ago, when I first became an expat, I found it difficult to find anyone who could help me, but things have changed, and tax advisors are now widely available.

Experts for Expats is fantastic starting point for people to get to know the tax system in the country they're living in and to connect with a specialist expert to make sure they're fully compliant.

Ultimately, if you're fully compliant, there's no risk of HMRC discovering that you've got an income that's not declared – and a tax advisor will keep you on the straight and narrow.

There are also a lot of people who leave the UK without informing HMRC, which is not advisable. When you leave the country, make sure you’ve provided all the necessary information to HMRC – a tax agent can help you with this as well.