HMRC issues 'nudge' letters to recipients of foreign investment income

HMRC is targeting taxpayers who received foreign investment income in 2019/20, and who, HMRC believes, claimed foreign tax credit relief incorrectly, or at the wrong rates. HMRC has issued 'nudge' letters to taxpayers encouraging them to reconsider their tax position.

Foreign tax credit relief

UK taxpayers who receive investment income, for example, interest or dividends from foreign countries with which the UK has concluded a double taxation agreement (DTA), may be entitled, subject to the terms of that particular DTA, to claim credit for tax paid on that income abroad to set against their UK tax liability, or relief from UK taxes on that income.

The terms of many of the UK's DTAs also impose certain restrictions on when this credit or relief is available, or on the rate at which it can be applied, for example, relief on dividend income is often restricted to a specific rate set out in the relevant article of the DTA in question.

Because the terms of the UK's DTAs are not standardised across the board (although many are based on the various iterations of the OECD model tax treaty), determining whether foreign tax credit relief is in fact available and, if so, at what rate, requires an analysis of the text of the relevant DTA and an application to the facts of the taxpayer involved.

HMRC's latest nudge letters

HMRC's latest nudge letters offer the recipients the chance to amend their 2019/20 tax returns to claim foreign tax credit relief at the correct rate, or not to claim it if it is not in fact available. Nudge letters should not be simply ignored. If taxpayers do not contact HMRC or submit corrections to their relevant tax returns, further steps are likely to be taken by HMRC, such as commencing a civil or criminal enquiry.

In our experience, HMRC nudge letters are not simply a 'fishing expedition'. HMRC tend to send nudge letters when they have grounds to suspect that a person's tax affairs may not be in order.

If HMRC have made an error, it should be possible to correct it by prompt and substantive engagement with them. Equally, if it emerges that corrective action is required by the taxpayer, open and early communication with HMRC should minimise the risk of HMRC imposing civil or criminal sanctions.

Further action

If you have received a nudge letter, either in relation to foreign investment income, or in relation to any other topic, and require expert advice, please contact Adam Craggs or Harry Smith.