Nudge, nudge say no more, the taxman may be looking.
There has been a number of media reports and financial services comment on HMRC “nudge letters”, including reports on a recent batch of at least 1,000 such letters targeted at owners of short-term holiday lets or “Airbnbs” as they are often now popularly characterised.
The typical “nudge letter” gives taxpayers the opportunity to engage with HMRC to remedy any suspected errors in recent self-assessment returns, before an official enquiry into their tax affairs is launched. Those receiving the letters are given a 30-day opportunity to return a detailed and apparently fairly onerous statement of their tax affairs relating to alleged area of potential omission. Outstanding tax, interest and penalties may be payable but punitive penalties associated with deliberate or negligent evasion are usually avoided.
Essentially it is an opportunity to prove innocence or come clean, rectify any genuine errors or omissions, whilst also avoiding the prospect of an in-depth examination of all tax affairs, potentially going back over any number of years; typical 4 to 6 but up to 20 years if HMRC deem it necessary. Even if there proves to have been no errors made, the in-depth investigations are apparently intrusive and expensive in terms of time and energy required to service them and should, if at all possible, therefore be avoided.
Nudge letters are now a commonly used HMRC tool across all business sectors and all areas of taxation. They are set to becoming more so, especially among the online sectors, as from 1 January 2024 the UK are due to bring OECD’s model rules for platform reporting in to force. By law these will oblige all trading platforms operating in the UK to report key information like earnings of all their UK tax paying users, to HMRC.
A couple of years ago, as part of their own settlement of their UK tax affairs, Airbnb “voluntarily” agreed to provide HMRC with this data for the 2017/18 and 2018/19 tax years, something that many hosts may be blissfully unaware of? In addition, the make tax digital programme is all but complete and HMRC have begun to employ sophisticated systems that can compare and contrast many millions of transactions across thousands of different digital systems, something that simply wasn’t possible to do manually as little as two or three years ago.
It is entirely possible that evidence from these earlier returns and from other similar agreements with other platforms, will have helped identify those hosts now in receipt of a nudge letter for subsequent tax years. What is absolutely certain is that we will see much more of it in future years driven by a mix of making tax digital, new automated and AI enabled investigative systems and critically the implementation of the OECD’s rules that will embrace everything from letting rooms, through eBay sales, Ubers and food deliveries income, to the earnings of online influences.
Beyond pursuing those that HMRC have good reason to suspect of having made (significant?) errors, the nudge campaigns have a clear role to play in demonstrating beyond any lingering historic doubt that HMRC now have, not just the will but also the means to crosscheck all actual earnings against those declared via tax returns or in some case, simply not declared at all because no return has been submitted. By doing so, they not only recover lost tax income from a minority but it also serves to scare the hell out of vast majority, who wouldn’t ordinarily dream of being careless, let alone deceitful, enough to try to defraud the taxman. In essence a highly efficient, high public profile but relatively low effort means of ensuring the vast majority continue to abide by the rules and that those that don’t are detected, punished and subsequently deterred from repeat the error.
All those using online platforms to let holiday accommodation need to be aware that HMRC already have new the means to check the detail of earnings voluntarily supplied by a number but not all platforms. Subject to the smooth passage of the necessary legislation that ability should become universal by the beginning of the of 2024, well ahead of the start of 2024-25 tax year and just after the final deadlines for the submission for most returns for the 2022-23 tax year. For those that have always assiduously reported their full earning this isn’t going to be an issue for others it may be a bit more of a problem, especially if they are not ware of rapidly changing circumstances.
Destination managers can help the nudge campaign and help local businesses by making sure that those short-term, holiday let owners they have dealings with are made aware of the changed and changing circumstance. That of course isn’t always as easily done as it sounds, because as we all know, only too well, this is a developing sector that now involve a multitude of new players, many of whom have tended to operate below the local (and national) radar, for various reasons, not least f which is that they can and there no “rules” to discourage it. Hence, in part the perceived and increasingly urgent need for, at the very bare minimum, a national registration scheme for England, if not a full statutory licencing scheme of the likes of that currently proposed for Wales.
If HMRC, the central players in the Westminster Government, can see the need for visibility and statutory oversight of areas like the short-term letting market, in order to enforce adherence to necessary rules on, in their case, necessary taxation, that surely adds significant weight to the current case for other statutory bodies to be given the most basic of means to reassert appropriate control over their necessary areas of statutory responsibility? Especially in this, case where those responsibility largely relate to the provision of clean, safe and legal guest accommodation. Accommodation which in current circumstance can be anything but clean, safe or legal because nobody is empowered or given the basic means to universally check adherence to regulations, let alone to physically check the premises themselves.
If nothing else the current nudge campaign illustrates one of the many potential associated benefits of local destinations being aware of and therefore communicating with all local businesses in the tourism accommodation sector and not just those who are either visible to or voluntarily engage with destination manage. Statutory registration/licencing would help reassert clear lines and routes of communication, that ironically modern means of communication have inadvertently served to complicate or cut entirely.