This article explains what these letters are, why HMRC is sending them, how they relate to SDLT law, what the Court of Appeal’s decision in Mudan means for this type of claim, and how penalties may be applied if a claim is later found to be incorrect.

What the NSFU-1 Letter and Form Are

The NSFU-1 letter is not a formal enquiry and does not legally require a taxpayer to respond. It is a pre-enquiry stage used by HMRC to encourage taxpayers either to confirm their belief in the refund claim or to withdraw it.

The enclosed NSFU-1 form provides two options:

• Confirming that the taxpayer believes the claim is correct
• Withdrawing the refund claim entirely

Although optional, the form is structured in a way that helps HMRC move taxpayers into one of these positions before deciding whether to open a formal compliance check.

Click here to see an example of an NSFU1 form ↗.

Why HMRC Uses the NSFU-1 Form

The form performs two primary functions within HMRC’s compliance strategy.

Encouraging early withdrawal

If a taxpayer withdraws the claim, HMRC can close the matter without further work.

Strengthening HMRC’s penalty position

If a taxpayer signs the form confirming that they believe their claim is correct, HMRC may rely on that signed declaration later.
If the legal test is not met, HMRC can use the declaration when arguing that the claim reflected a careless inaccuracy under Schedule 24 of the Finance Act 2007.

How This Connects to the SDLT Definition of a Dwelling

The key legislative provision is section 116 of the Finance Act 2003. A property is residential if it is:

• used as a dwelling
• suitable for use as a dwelling
• being constructed or adapted for such use

Refund claims of this type argue that the building had deteriorated so severely that it was no longer suitable for use as a dwelling at the time of completion.

HMRC’s stance is that only a very small number of properties meet this threshold.

The Mudan Case and the Legal Threshold

The Court of Appeal’s decision in Amarjeet & Tajinder Mudan v HMRC [2025] EWCA Civ 799 is now the leading authority on what it means for a property to be “suitable for use as a dwelling”.

The Court confirmed several key principles.

Suitability does not mean “ready to live in”

A property can be unsafe, require significant repair, or be unmodernised but still be considered a dwelling in law.

The focus is on the building’s identity

The question is whether the property has lost the essential characteristics of a dwelling.
Refurbishment needs do not remove suitability unless they are part of a fundamental structural failure.

Only rare situations qualify

Examples that may fall outside the definition include buildings that:

• are structurally unsound
• are unsafe even to repair
• are close to collapse
• have effectively become shells

These cases are unusual. Ordinary renovation work, even at “uninhabitable” levels, generally does not meet the test.

If you have questions on what is suitable for use as a dwelling, see the web page here↗.

How Penalties Work Under Schedule 24 FA 2007

If HMRC challenges a claim and finds it incorrect, they then assess how the inaccuracy arose. Penalties depend on the behaviour that caused the error.

Reasonable care

If a taxpayer took reasonable care to get things right, no penalty applies.

Careless behaviour

Careless behaviour applies where HMRC believe the taxpayer failed to take reasonable care when making or continuing the refund claim. It does not require intent. HMRC only need to show that a reasonable person in the same situation would have checked the facts more carefully, sought proper advice, or understood that the legal test was stricter than the claim suggested.

Careless penalties are calculated as a percentage of the Potential Lost Revenue (PLR).
The PLR is the amount of tax that HMRC say was wrongly reclaimed.
So if the refund claimed was £12,000, the PLR is £12,000, and penalties are applied to that figure.

The penalty ranges for careless inaccuracies are:

• 0% to 30% of the PLR for an unprompted disclosure (where the taxpayer tells HMRC before HMRC has raised any concerns)
• 15% to 30% of the PLR for a prompted disclosure (where HMRC contacts the taxpayer first)

In the context of NSFU-1 letters, any later correction or withdrawal is normally treated as prompted, because HMRC have already identified the claim. This means penalties start at 15% and can rise to 30% of the refund amount.
For example, on a £12,000 refund, a careless penalty could therefore be between £1,800 and £3,600.

Deliberate behaviour

Deliberate behaviour applies where HMRC believe the taxpayer knew the claim was wrong when submitting it, or knowingly allowed it to continue despite understanding that the property did not meet the legal threshold. This involves an element of intent, rather than oversight or misunderstanding.

Penalties for deliberate inaccuracies are also based on the Potential Lost Revenue.
Using a £12,000 refund claim as an example, penalties are applied directly to the £12,000.

The penalty ranges are:

• 20% to 70% of the PLR for an unprompted disclosure
• 35% to 100% of the PLR for a prompted disclosure

A prompted deliberate penalty could therefore be anywhere from £4,200 to £12,000 on a £12,000 claim.

Deliberate findings are rare in SDLT cases, but HMRC may argue them where they believe the taxpayer had clear reason to know that the claim could not meet the threshold set out in the Court of Appeal decision in Mudan, yet proceeded anyway.

How the NSFU-1 Form Affects Penalty Exposure

If a taxpayer signs the form stating that they believe the claim is correct, and HMRC later decide that the legal threshold was clearly not met, HMRC may argue:

• the taxpayer failed to take reasonable care
• the signed declaration shows the taxpayer chose to stand by an incorrect position

This makes it easier for HMRC to classify the behaviour as careless, and therefore easier to impose a penalty.

Assessment Tools and Analysis

Some professional assessment tools now exist to help evaluate whether a property meets the strict Mudan threshold. These tools consider:

• the property’s condition at completion
• the Court of Appeal’s findings
• earlier tribunal decisions
• the legislative definition in section 116

Such tools cannot guarantee the outcome of a case, but they can provide a helpful indication of whether a claim is likely to be strong, borderline, or weak.

Summary

NSFU-1 letters and forms are now a standard part of HMRC’s approach to SDLT refund claims based on the argument that a property was “not suitable for use as a dwelling”. The form itself is optional, but it is structured in a way that supports HMRC’s compliance aims, either by securing early withdrawals of claims or by providing evidence that may be used during penalty assessments.

The Mudan decision confirms that the legal threshold for these claims is very high. Only properties that have lost their essential character as dwellings, usually due to severe structural failure, are likely to qualify. If a claim does not meet this threshold and HMRC challenge it, penalties for careless inaccuracies may be applied under Schedule 24 FA 2007.

This framework explains why the letters are being used, how they fit into the law, and how later penalty considerations arise.