The worldwide disclosure facility

 

The worldwide disclosure facility (WDF) opened on 5 September 2016 and is described as ‘the last chance’ before tough new sanctions are introduced following the ‘requirement to correct’ period (which is the subject of an ongoing consultation), including penalties, ‘naming and shaming’ and an increased risk of criminal investigation.

 

HMRC recently issued the International Tax Compliance (Client Notification) Regulations 2016, SI 2016/899, which specify the clients that advisers will need to contact to warn them of the consequences of failing to fully disclose their UK tax liabilities and advertise the WDF. Further guidance is expected before advisers contact the specified clients between 30 September 2016 and 31 August 2017. This and any publicity undertaken by HMRC should raise awareness of these changes.

 

The launch of WDF is interlinked with the common reporting standard (CRS), the automatic information exchange of bank data from around the world and registers of beneficial ownership. HMRC has improved its efficient, effective data analysis capabilities to handle bulk data. Consequently, it simply does not believe that it needs to offer incentives for disclosure, as it will soon receive data from over 100 countries from which it will identify cases for investigation.

 

In addition, FA 2016, ss163, 165 & 166 introduce enhanced penalties for offshore matters, as well as strict liability criminal offences which remove the need for HMRC to prove that the taxpayer intended to fail to disclose their offshore income and gains as part of the prosecution process. These developments are in addition to other recent changes, such as the introduction of an offshore asset moves penalty (FA 2015, Sch 21) and the tightened publishing of deliberate defaulter rules (FA 2016, s164).

 

Consequently, taxpayers using the WDF must pay the full tax, late payment interest and penalties due, as calculated under existing rules. Tax may therefore be due for four, six or 20 years under the rules in TMA 1970 ss 34 and 36 (or the corporate equivalents in FA 1998), depending on the reason for the original error or failure. These time limits are modified for deceased persons (TMA 1970 s 40) and inheritance tax (IHTA 1984 s 240).

 

There is no protection from prosecution or ‘naming and shaming’ of deliberate defaulters (FA 2009 s 94) following a disclosure. However, it is expected that taxpayers making accurate voluntary disclosures will not be subject to either sanction. In addition, taxpayers who disclose deliberate errors or omissions may be placed in HMRC’s managing serious defaulters regime.

 

 

The WDF enables disclosures of UK tax relating to income, assets or activities located wholly or partly outside the UK.

 

Individuals can make disclosures about their own or their company’s tax affairs, as well as disclosures about trusts, estates or limited liability partnerships. Tax advisers, personal representatives and executors of estates may also make disclosures on behalf of the taxpayer. If an individual needs to make a disclosure relating to their personal tax affairs, as well as the tax affairs of a company of which they are a director, then two separate disclosures will be needed.

 

Non-UK resident individuals can also use the facility. As with previous disclosure facilities, HMRC has the discretion to refuse a taxpayer’s application where criminal property is involved.

 

 

Firstly, the person or their agent must complete an online registration notifying HMRC of their intention to make a disclosure via HMRC’s digital disclosure service (DDS). The DDS will issue a disclosure reference number once registration is complete. The DDS is also used for disclosures to HMRC under the let property campaign, the credit card sales campaign and the second incomes campaign.

 

Online portals may make a tax disclosure look deceptively simple; in fact, there are many complexities, including the number of years to include, the type of penalty to apply, anti-avoidance laws and other tax legislation that might be relevant. The invitation to participate in a ‘web chat’ with HMRC is surely fraught with risk; people may be asking questions when they ‘don’t know what they don’t know’.

 

 

The initial notification starts a 90 day deadline within which a full disclosure must be submitted. In these 90 days, all of the relevant information must be gathered, analysed and the disclosure prepared. In contrast, under the recent Liechtenstein disclosure facility, people had up to ten months for this process. This short timeframe may cause issues for complex disclosures or where the financial institutions are unable to provide the relevant information in a timely manner. Consequently, careful planning and specialist professional advice will be necessary to navigate the process. Delaying registration to give time for information collation carries the risk that HMRC might open an enquiry in the meantime, thus removing any ‘unprompted’ penalty reduction. HMRC might also open a criminal investigation in this period too, so any delay requires careful consideration of the client’s specific circumstances and risks.

 

Each disclosure must include detailed tax and penalty calculations for all affected years. A new departure by HMRC is to make it a requirement of the WDF that taxpayers detail how they reduced the amount of tax payable in their disclosure ‘because of consideration and interpretation of the law. Enter all circumstances that apply, the response is an integral part of your disclosure and an inaccurate or incorrect response may lead to a civil intervention or criminal prosecution.’ HMRC provides a list of topics such as residence and domicile on which comments may be made. Any topics not listed can be commented on via the ‘other issues’ part of the disclosure.

 

Full payment needs to be made on submission of the disclosure, although time to pay arrangements may be possible if hardship is evident. In addition, the taxpayer is required to disclose the maximum value of all assets held outside the UK at any point over the last five years, including trust interests. An offer letter must also be submitted with the disclosure.

 

Separate disclosures need to be made for VAT and tax credit irregularities. If inheritance tax is due on an event that is more than 20 years ago, then it cannot be included in the WDF and must be disclosed separately.

 

 

The introduction of a clearance process for complex issues is unique to the WDF. In offshore tax cases, there are often complex tax points at stake which need to be discussed with HMRC, such as residence, domicile, the application of anti-avoidance legislation to trust structures or the categorisation of the behaviour which led to the error or failure.

 

A clearance application may be submitted after the taxpayer has registered to make a disclosure with the DDS. HMRC then allows ‘90 days from the time that [the] application for clarification is finalised’ to submit the final disclosure. This may allow additional time to prepare a disclosure while HMRC considers the application.

 

However, a significant amount of work may be required upfront to prepare the application for clearance, including detailed technical analysis following a fact finding exercise. Large and complex cases may also warrant a counsel’s opinion in respect of any points of legal interpretation prior to submission of the clearance application.

 

The clearance process facilitates the submission of relevant background and supporting information. This may pre-empt any post disclosure submission queries and is an important part of any clearance application. Whilst there is no right of appeal against HMRC’s views as a result of the clearance process, taxpayers may submit disclosures on the basis which they consider correct. If HMRC takes a different technical view and issues assessments accordingly, then the taxpayer may appeal against those assessments in the usual way.

 

While HMRC considers that clearance will only be required in exceptional circumstances, clearances may be required in all but the simplest of cases. However, HMRC states that it will not offer clearance where it believes that there are not genuine points of uncertainty. It remains to be seen how the clearance process will function in practice.

 

Using the WDF without the clearance process leaves very limited scope to provide background information and explanations for the liabilities disclosed due to the DDS interface. Making a disclosure which lacks the full background information and explanations may increase the likelihood of subsequent investigations for taxpayers with complex financial affairs.

 

 

As the WDF has no special terms, taxpayers must calculate penalties using all existing penalty rules such as those in FA 2007 Sch 24 and its predecessor TMA 1970 s 95. If a taxpayer made a settlement following a previous enquiry or disclosure, HMRC will consider a new disclosure under the WDF but may apply higher penalties if it covers the same period. In addition, those taxpayers who use the facility to make a disclosure despite already being subject to an enquiry are unlikely to be eligible for the extra reductions for making an unprompted disclosure.

 

In addition, HMRC’s WDF guidance (www.bit.ly/2cBekyY) states that: ‘In specific circumstances it may not be appropriate to allow you the full reductions for disclosure. For example if you’ve taken a significant period to correct your non-compliance, or you could have previously made a disclosure through one of HMRC’s offshore facilities, you cannot expect HMRC to agree a full reduction for disclosure. In such cases it’s unlikely that HMRC will reduce your penalty by more than ten percentage points above the minimum of the statutory range. For this purpose HMRC would normally consider a “significant period” to be over three years, or less where the overall disclosure covers a longer period.’

 

This statement, its interaction with statutory penalty rules and the client’s own circumstances will need careful consideration prior to a disclosure’s submission.

 

 

HMRC will issue an acknowledgement within 15 days of the disclosure’s submission. HMRC aims to indicate the next steps within a further 40 days. ‘Next steps’ may mean that HMRC moves towards accepting the disclosure or HMRC may seek further information and enquire into the disclosure. In some cases where HMRC considers the disclosure to be incomplete, it may consider either launching a civil investigation or opening a criminal investigation with a view to prosecution.

 

Where taxpayers are already subject to an enquiry or investigation, including one in relation to something for which a DOTAS number was issued, the current inspector will review the disclosure before HMRC considers accepting it.

 

HMRC will formally accept a taxpayer’s offer once agreement is reached. This will provide certainty to the taxpayer that their UK tax affairs are up to date following their full disclosure.

 

 

The announcement of the WDF is not only targeted at hardened tax evaders. HMRC’s guidance and commentary on gov.uk clearly states that that anyone who has not paid ‘the right amount of UK tax’, whether through innocent mistake, outdated advice or ignorance, should use it to make a disclosure as long as the UK tax at stake relates to an offshore matter. Timing, cooperation and expert advice are all vital. The WDF provides a process for taxpayers with offshore issues, giving them one last chance to regularise their affairs. However, careful consideration will be required to determine whether this is the best avenue for disclosure and the process deadlines must be managed with extreme care.