Worldwide Disclosure Facility: Penalties, extended time limits, and common issues

We’ve helped many clients bring their tax affairs up to date using the Worldwide Disclosure Facility.

Clients are often worried about what is involved, but while specialist advice is essential, the process is well trodden, and we cover the key issues here.

The Worldwide Disclosure Facility is a voluntary disclosure process introduced by HM Revenue & Customs (HMRC) for individuals and entities to disclose UK tax liabilities related to offshore issues.

The facility aims to encourage taxpayers to come forward and voluntarily rectify their tax affairs.

In light of increased international tax transparency under the Common Reporting Standard (CRS), initiated in 2017, there has been a significant increase in the number of HMRC “nudge letters” and enquiries.

The Worldwide Disclosure Facility offers a way to avoid a lengthy HMRC investigation process by proactively making a tax disclosure before commencement of a HMRC enquiry.

You can also use the Worldwide Disclosure Facility before HMRC contact you if you realise that you have undisclosed tax, or if you have received a nudge letter.

Who can use the Worldwide Disclosure Facility?

Anyone who needs to disclose a UK tax liability that relates wholly or partly to an offshore issue can use the Worldwide Disclosure Facility.

Offshore issues include unpaid or omitted tax relating to:

• Income arising from sources outside the UK
• Assets situated or held outside the UK
• Activities carried on wholly or mainly outside the UK
• Funds connected to unpaid or omitted UK tax transferred to or owned in a territory outside the UK

It is crucial to ensure that all undeclared taxes are covered when disclosing tax irregularities through this facility.

Failure to do so could impact the level of penalties charged.

How the Worldwide Disclosure Facility process works

The first step is to notify HMRC that you want to make a disclosure.

You should do this as soon as possible.

Initially, you only need to inform HMRC of your intention to disclose, without providing details of the undisclosed income or the tax you believe you owe.

You will then have 90 days to make a disclosure.

During this period, you will need to review the undeclared income and gains and self-evaluate your tax, interest, and penalty liability.

When you submit your disclosure to HMRC, you should pay the amount you owe or, if this is not possible, agree a payment plan.

Offshore Penalty Regime

Due to the historic prevalence of offshore tax evasion, the government has adopted a tough stance, imposing severe penalties for undeclared offshore income.

Two key penalty regimes apply, depending on the timing of the error.

Failure to Correct penalties

For Income Tax and Capital Gains Tax relating to offshore matters, individuals were required to correct their tax position for periods prior to 6 April 2016 by 30 September 2018.

If an individual did not correct their tax position by this date, Failure to Correct penalties will apply.

Penalties are based on the potential lost revenue (PLR), i.e. the amount of tax lost as a result of the failing.

The Failure to Correct penalty rates are:

• For prompted disclosures: 150 per cent – 200 per cent of the PLR
• For unprompted (or voluntarily) disclosures: 100 per cent – 200 per cent of the PLR.

It is important to proactively make the disclosure as soon as possible to avoid higher penalties.

HMRC will not charge a Failure to Correct penalty where an individual can demonstrate they had a reasonable excuse for the failure.

Standard Offshore Penalty rules

For tax irregularities outside of the Failure to Correct regime, penalties can range from zero per cent to 200 per cent, depending on a number of factors.

This includes whether the taxpayer:

• submitted an inaccurate return; or
• failed to notify HMRC that they had a tax liability.

Penalty rates for deliberate errors are higher than those relating to careless errors.

Penalties relating to income from ‘high risk’ or ‘less transparent’ countries will attract higher penalties than those where income was from a low-risk country.

Penalties are also mitigated by the extent to which HMRC are provided assistance in quantifying the tax.

Extended Time Limits

HMRC has extended time limits to make assessments for offshore liabilities.

For liabilities relating to offshore income and gains, HMRC can usually assess the previous 12 tax years.

There are a few statutory defences in place to mitigate this, however they require very specific circumstances to be in play.

The assessing time limit extends to 20 years if deliberate conduct has occurred or if the individual failed to notify HMRC that they needed to complete a tax return.

Common issues leading to trouble

Several problems can arise when using the Worldwide Disclosure Facility:

• Ignoring HMRC nudge letters: HMRC frequently sends nudge letters to taxpayers suspected of having undisclosed offshore income or gains. Ignoring these letters can lead to severe penalties and enforcement actions.
• Incomplete or inaccurate disclosure: Failing to provide complete and accurate information can result in higher penalties and a potential criminal investigation. It is crucial to seek professional advice to ensure all relevant details are disclosed.
• Misunderstanding offshore issues: Taxpayers often misunderstand what constitutes an offshore issue, including income, assets, and activities outside the UK, as well as funds connected to unpaid UK tax transferred offshore.
• Criminal property: If HMRC suspects that assets or funds included in your disclosure are wholly or partly made up of criminal property, they have the discretion to refuse your application to take part in the Worldwide Disclosure Facility.

How we help you navigate the Worldwide Disclosure Facility

It is always recommended that specialist advice is taken when making any disclosure to HMRC.

This is even more important when using the Worldwide Disclosure Facility, given the additional complexities around offshore tax, penalties and extended time limits.

Failing to complete a disclosure correctly could result in significant penalties or even a criminal HMRC investigation being conducted.

The team at inTAX are specialists in making disclosures through the Worldwide Disclosure Facility and can help you to avoid any such process. In particular we can:

• Determine your historic tax residency status.
• Identify any undeclared offshore income and gains to determine if they are taxable in the UK and if a disclosure is required.
• Quantify the correct amount of tax due, including applying any double taxation relief and making any claims to minimise tax liabilities.
• Submit a disclosure to HMRC through the Worldwide Disclosure Facility.
• Ensure that you are charged the lowest possible penalty rate based on your fact pattern.
• Respond to any queries HMRC may have following submission of the Worldwide Disclosure Facility.

The Worldwide Disclosure Facility offers a valuable opportunity for taxpayers to rectify their offshore tax affairs.

Understanding the differences in penalties, extended time limits, and common issues is crucial for making a successful disclosure.

Speak to us for professional advice that can help you navigate the complexities of the Worldwide Disclosure Facility and ensure that your tax, interest, and penalty liabilities are minimised.

You can get in touch with our friendly and experienced team on: 0203 675 8122 or email jeremy.johnson@intaxltd.com.

inTAX is a specialist tax disputes firm. We deal with disclosures, investigations, and tax enquiries of all descriptions, including COP9, fraud investigations, VAT fraud, tax avoidance, let property disclosures and tribunal appeals. However, we don’t just deal with the serious end of tax investigations; we are also happy to handle smaller enquiries, disputes and problems that can be equally as worrying for our clients