The Worldwide Disclosure Facility (WDF) opened in September 2016 and is an HMRC process which allows anyone who needs to disclose a UK tax liability that relates wholly or partly to an offshore issue to do so.
Offshore issues include unpaid or insufficient tax paid in relation to:
- income arising from a source in a territory outside the UK.
- assets situated or held in a territory outside the UK.
- activities carried on wholly or mainly outside the UK.
- funds connected to unpaid or omitted UK tax that have been transferred to a territory outside the UK.
It is a common misconception that if tax is paid elsewhere on the underlying income or gains, there will then be no tax reporting obligations or additional tax to pay in the UK.
The most common examples we see are where UK resident and domiciled taxpayers, or UK resident and non-domiciled taxpayers who do not pay tax on the remittance basis, are unaware they may have a UK tax liability arising on:
- bank accounts and investment portfolios held outside the UK.
- rental income on property located outside the UK
These are the two most common examples but the number of scenarios that can be caught is limitless. For taxpayers taxable on their worldwide income and gains (the arising basis), it does not matter if the underlying funds are not brought back or used in the UK.
Have you received a letter from HMRC?
Over recent years HMRC has made increasing use of their so-called “nudge letter” or “one to many” approach. This is where HMRC send one standard message to many taxpayers. If you have received a letter from HMRC which is written in very general terms, which may also be accompanied with a request to complete a Certificate of Tax Position (see below), then you have been identified by HMRC as someone who may need to make a tax disclosure.
Despite the letters often being sent to thousands of taxpayers they are not sent at random. The letter will be based on data HMRC has obtained on you which may be incorrect or misleading, but an explanation to HMRC will still be required.
The approach taken by HMRC has proven successful from their perspective in encouraging taxpayers to come forward and make tax disclosures.
Menzies’ advice to taxpayers who are asked by HMRC to complete and return a Certificate of Tax Position, which were introduced in January 2019, is to remind them that there is no legal obligation to do so. The certificates do not specify the tax year(s) which they relate to and do not set a de-minimis level. There are serious consequences for providing a false declaration to HMRC and therefore taking professional advice is essential. Despite not returning the Certificate of Tax Position the letters from HMRC should not be ignored.
How does the WDF process work?
An online notification is made to HMRC informing them of an intention to make a disclosure under the WDF. On receipt of the letter confirming the taxpayer’s acceptance into the WDF HMRC allow 90 days for the taxpayer, or their advisor, to calculate the tax, interest and potential penalties due. In the most complex cases this can be extended to 180 days. Menzies approach is to also prepare and submit a separate disclosure letter to HMRC to explain the background and make representations on the taxpayer’s behalf.
The tax calculations can potentially go back up to 20 years depending on the circumstances. The nature of the underlying “tax offence”, i.e. whether it is an error in a filed return or whether no tax returns have been filed, as well as the “behaviours giving rise to the loss of tax”, will determine how many years to include in the disclosure.
Tax disclosures with an offshore aspect have become increasingly complex in recent years due to the impact of the Requirement to Correct (RTC), Failure to Correct penalties (FTC), and changes to the offshore tax assessment time limits.
What happens if you do nothing?
If you need to make a disclosure and choose not to come forward, then you can expect HMRC to open an enquiry into your tax affairs. The downsides of adopting this approach include:
- Not retaining control over the enquiry and facing uncertainty that can last many months or years.
- Higher financial penalties, particularly in cases where HMRC has issued a nudge letter to the taxpayer.
- The risk that HMRC will start focusing on other aspects of your tax affairs, even if there are no other issues to disclose.
Worldwide Disclosure Facility – reasonable excuse
In some limited circumstances HMRC will accept that the taxpayer has a reasonable excuse or has taken reasonable care when seeking to comply with their UK tax obligations. If accepted, this will have a positive impact on the disclosure in terms of restricting time limits and potentially eliminating the imposition of any financial penalty.
If you would like to discuss the Worldwide Disclosure Facility or voluntary disclosures more generally, please contact Menzies’ Tax Disputes and Disclosures team below: