Worldwide Disclosure Facility 101

UK residents in receipt of foreign income and gains must either report and pay tax on them, or claim a special tax status, currently the FIG regime and historically the remittance basis.

If you have not declared the foreign income and gains, and have not claimed a special status, the Worldwide Disclosure Facility offers a formal process to bring your affairs up to date with HMRC.

This guide explains why the facility exists, how the process works, and how Global Tax Consulting can help you through it.

The obligation to report

A common misconception among UK residents with international interests is that paying tax in a foreign country removes the need to report in the UK. It does not. Tax paid overseas does not remove your reporting obligation to HMRC.

Where you have already paid tax on that income in another jurisdiction, you may be able to take it into account by claiming a Foreign Tax Credit, which reduces your UK liability.

The reporting requirement remains regardless. Failure to disclose the income can result in penalties even where no additional tax turns out to be due.

Why HMRC will find out: the Common Reporting Standard

A wait and see approach to offshore tax is increasingly risky. Under the Common Reporting Standard, an international agreement signed by over 100 countries, financial data is shared automatically. Foreign banks, investment firms and insurance companies report accounts held by non-residents to their local tax authority, which passes the information to HMRC.

The data shared includes:

●       Bank account balances and interest earned.

●       Dividends and sales proceeds from financial assets.

●       The identity of the account holder and their tax residence.

HMRC now has one of the most sophisticated data matching systems in the world. Where offshore assets are concerned, it is no longer a question of whether HMRC finds out about undeclared foreign income, but when.

Receiving a nudge letter from HMRC, which suggests they already hold information about your overseas interests, significantly reduces your ability to mitigate the penalty.

What is the Worldwide Disclosure Facility?

The Worldwide Disclosure Facility is the mechanism HMRC provides for individuals and businesses to bring their affairs up to date in relation to undeclared foreign income and gains. It forms part of the Digital Disclosure Service and is designed specifically for offshore matters.

An offshore matter includes:

●       Income arising from a source outside the UK.

●       Assets situated or held outside the UK.

●       Activities carried out wholly or mainly outside the UK.

●       Funds or assets transferred outside the UK.

Using the facility lets you disclose unpaid liabilities from earlier years in a structured and transparent way.

How far back HMRC can go

Offshore matters carry much longer assessment windows than domestic ones. For offshore income and gains, HMRC has an extended window of twelve years as standard. Where the failure was deliberate, that extends to twenty.

⚠️ WARNING  If you have never notified HMRC of the foreign income or gains at all, rather than filing a return that understated them, HMRC can go back as far as twenty years. Failure to notify is treated more seriously than an inaccuracy on a return you did submit, so someone who has simply never told HMRC about an offshore account or property can face the full twenty year period.

The five step process

The facility follows a strict and time bound procedure. Once the process begins you need to be ready to move quickly.

Image 1 — the five steps and the 90 day window

1. Make a notification

The first step is to notify HMRC that you intend to make a disclosure, done through the Digital Disclosure Service. HMRC will then issue a Disclosure Reference Number.

You can notify HMRC that you intend to make a disclosure.

2. Gather records and complete calculations

Once you have notified HMRC you have a 90 day window to submit the full disclosure. During that period you gather the relevant financial records from earlier years, including bank statements, property sale documents and dividend vouchers. You then calculate the exact tax owed, plus interest running from the date each amount was originally due, and the appropriate penalty.

3. Prepare the disclosure

With the calculations complete, prepare the formal disclosure. This sets out the nature of the income, the years it relates to, and an explanation of why it was not declared at the time. That narrative is a critical part of the process, because it is what helps HMRC understand the behaviour behind the failure, which is a key factor in setting the penalty.

4. Pay what you owe

At the point of submitting the disclosure you are expected to pay the full amount of tax, interest and penalty you have calculated. If you cannot pay in full immediately, approach HMRC to discuss a payment plan before the 90 day deadline expires rather than after it. Payment is usually made by bank transfer using your Payment Reference Number.

5. Wait for acceptance

After submission HMRC reviews the disclosure and may ask follow up questions or request documents to verify your figures. Once satisfied that the disclosure is complete and accurate, they issue a formal acceptance letter. That confirms your affairs are up to date and gives you protection from further investigation for the years covered.

Penalties and mitigation

The penalty applied through the facility is not fixed. It depends on three things: the type of income, the territory the income came from, and the behaviour behind the failure.

Behaviour

●       Reasonable care taken.  Where you made a genuine mistake despite taking proper care, HMRC may accept there is no penalty at all.

●       Careless.  You failed to take reasonable care, but it was not a deliberate choice to hide income. Penalties apply, and are substantially reduced where the disclosure is unprompted.

●       Deliberate.  You knew the income should have been declared and chose not to. These carry the highest penalties and, in serious cases, can lead to criminal investigation where the position is not disclosed voluntarily.

The territory categories

Where the income arose also matters. Territories are grouped into three categories according to how much information they share with the UK, and the maximum penalty rises as transparency falls.

Image 2 — the three territory categories

These are ceilings rather than starting points. The behaviour behind the failure, and whether the disclosure was unprompted, decide where within the range you actually land.

HMRC WDF penalties.

The benefits of coming forward voluntarily

It is always better to approach HMRC before they approach you. There are three main benefits to an unprompted disclosure.

●       Lower penalties.  Unprompted disclosures attract materially lower percentages than positions opened up after an HMRC investigation has begun.

●       Closing the door on investigation.  A full and honest disclosure removes the prospect of a deep investigation, which is intrusive, slow and considerably more expensive.

●       Certainty.  Many expats live with background anxiety about a letter arriving. Completing the process removes that and puts your position on a settled footing.