HMRC hits contractors with BADR ‘nudge’ letters

Limited company contractors who HMRC suspects of breaching the £1m Business Asset Disposal Relief limit are being braced by officials.

HMRC told the contractors, in writing, that they went over the £1million lifetime limit with a 2023/24 claim, or did so beforehand.

The ‘Please check your Business Asset Disposal Relief claim’ letters from HMRC hit both limited company director-types in January 2025.

‘Respond to HMRC promptly’

The letters led to experts advising, “if you’ve claimed BADR recently,” and received an HMRC BADR letter, you should “respond promptly”.

Nathan Lewis of tax firm Monahans, who issued the tips online, also advised recipients to check their records against the lifetime limit.

Former tax inspector Tom Wallace agrees about the need to review – but says directors are under no legal requirement to reply to HMRC.

‘No penalty for ignoring HMRC’s BADR nudge letter’

“There is no penalty for not responding. And these letters are not formal enquiries into the return.

“However,” Mr Wallace of WTT Group further told ContractorUK, “failure to [reply] will likely result in an enquiry being opened.”

The rub isn’t just a Catch-22 of the “BADR nudge letters” he said, but that a big fall in the BADR allowance occurred in a small timeframe.

‘Directors caught out by BADR lifetime limit reducing to £1m’

Lisa Thomas, a licensed insolvency practitioner at Parker Andrews, explained to ContractorUK:

“Noting that the lifetime limit is capped at £1million, having been reduced from [a huge] £10million in 2020, [is crucial].

“Many directors will be caught out by the lifetime limit reducing [by so much].

“Directors should [therefore] make careful checks before making any further claims to avoid having them rejected by HMRC.”

‘Lower’

Business Asset Disposal Relief lets eligible shareholders pay CGT at just 10% by liquidating via a solvent Members’ Voluntary Liquidation.  

SFP Group has pointed out that BADR therefore offers a “lower” Capital Gains Tax rate than would otherwise be due to HMRC.

But the 10% rate is due to increase to 14% from April 6th 2025, and then it will increase again to 18% from April 6th 2026.

The government says the increases will impact an estimated 264,000 individuals in 2025 to 2026, who will pay more CGT.

‘Unsure’

The change in the BADR lifetime allowance is therefore not the only revision threatening to trip up limited company contractors.

“Seek advice if you’re unsure about your position,” urged Monahan’s Mr Lewis, albeit addressing the suspected over-claimers of BADR.  

“Staying compliant is key. [And] professional guidance can help avoid unexpected liabilities.”

‘Opportunity, but beware prospect of higher HMRC penalties’

An adviser to a contractor in receipt of an HMRC BADR letter could use it as an “opportunity” to amend the return, says WTT’s Mr Wallace.

Or a professional adviser appointed on behalf of the recipient could outline to HMRC “why no amendment is needed”.

WTT’s director of tax investigations added last night: “Failure to [reply] will likely result in an enquiry being opened to formally check the claim. 

“Should such a formal investigation show the claim is invalid, then failure to address the nudge letter may be a contributing factor to higher penalties being imposed.

“As such, it is sensible that where a recipient of such a letter is unsure of the validity of the claim, they should seek specialist advice to help them respond and protect their position.”

Interestingly, contractors appear to be across their tax position from April but, if the nudge letters are anything to go by, less across the lifetime limit.

‘HMRC hot on the heels’

At Parker Andrews, Ms Thomas said: “The anticipated influx of MVLs has already begun by savvy shareholders who want to make the most of the [10% rate] before the change.

“[At the same time] Revenue & Customs…is already hot on the heels of those who have fallen foul of the lifetime reduction.”

In its nudge letters, HMRC says of BADR, formerly Entrepreneurs’ Relief: “The [lifetime] limit was reduced from £10 million to £1 million on 11 March 2020.

“If you have already claimed £1 million or more before this date, you have already reached your limit. This means you will not be able to claim any future BADR.”