HMRC limits DAC6 reporting obligations and will introduce new mandatory reporting regime following Brexit agreement
On 31 December 2020, HMRC unexpectedly announced that the UK will repeal the implementation of the EU Directive on administrative cooperation (“DAC6”). Instead, the UK will introduce its own mandatory disclosure rules (“MDR”) as soon as practicable and will be based on OECD’s model MDR. Now the scope of DAC6 is significantly reduced so that only cross‑border arrangements that meet hallmark D are required to be reported in line with OECD requirements. Such limited reporting obligations will remain in place until the new MDR is implemented.
This alert is relevant to all companies with a connection to the UK and/or the EU that design, organize, implement or make available a transaction, commonly known as “intermediaries”, which may include accountants, banks, consultants, investors, financial advisors and lawyers.
DAC6 creates an EU-wide reporting framework to provide tax authorities with an early warning mechanism on new risks of tax avoidance, enabling those authorities to carry out audits more effectively, and to clamp down on aggressive tax planning by imposing a legal obligation on intermediaries (and in some cases, the taxpayer) to report a transaction to national tax authorities.
Under DAC6, an arrangement is reportable if: (1) it is a cross-border transaction, being one that concerns either more than one EU Member State, or an EU Member State and a third party, e.g., the UK, and (2) it contains one or more of the DAC6 hallmarks, which are features or characteristics that are considered as likely to give rise to harmful tax practices.
DAC6 has retrospective effect, meaning all cross-border arrangements implemented since 25 June 2018 that fall within its ambit will need to be reported by 28 February 2021. Reportable arrangements where the first step of implementation took place between 1 July and 31 December 2020 must be reported by 30 January 2021, and reportable arrangements made after 1 January 2021, must be reported within 30 days of the triggering event.
Following HMRC’s announcement, only arrangements falling within the ambit of hallmark D need to be reported before the deadlines as outlined above. Arrangements that meet hallmark D cover two types:
1. Arrangements that have the effect of undermining reporting requirements under agreements for the automatic exchange of information. Note that these arrangements are required to be reported in accordance with OECD’s Common Reporting Standard; and
2. Arrangements that obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.
As hallmarks A, B, C and E have been repealed, the number of reports initially anticipated to be made in the UK will likely be greatly reduced; however, this does not eliminate the legal obligation to report in the EU Member State if the reportable arrangement involves an EU intermediary. There may be circumstances where a reportable arrangement between the UK and an EU Member State is required to be reported to the relevant tax authority in that Member State, but not HMRC in the UK.
Under the EU-UK Trade and Cooperation Agreement, the UK must not reduce the level of protection in its legislation below the level of protection provided by the OECD’s MDR. It remains unclear what the UK plans to include in its own MDR. HMRC anticipates that there will be limited overlap between the Disclosure of Tax Avoidance Schemes and the MDR. During the consultation for the draft legislation, HMRC will be seeking to eliminate circumstances of double reporting under the two regimes. HMRC may draw from its experience from implementing DAC6, as well as look to MDRs in other jurisdictions when developing its reporting regime. Nevertheless, it is difficult to anticipate exactly how the UK MDR will shape up.
The UK government is expected to launch a consultation of draft legislation on the MDR later this year and then lay the legislation before Parliament towards the end of the year. It is likely that reporting under the new MDR will start in 2022. In the meantime, the amended DAC6 legislation, which now covers only hallmark D and was only implemented on 1 July 2020, will continue to apply until the new MDR is introduced.
The proposed overhaul on the regime of reporting obligations has also triggered many unanswered questions, such as whether UK businesses are liable to report in EU Member States that have implemented DAC6 with an extra-territorial element (e.g., Poland), and whether an EU intermediary can rely on a report being made in the UK. The latter will ultimately depend on the tax authority in the EU Member State with which the EU intermediary has a nexus, determining whether a report made in the UK can be accepted as evidence of DAC6 reporting. Conversely, a UK intermediary is able to rely on a DAC6 report being made in an EU Member State by simply citing the arrangement reference number.
Further, it is also not confirmed whether the UK will continue to share and receive DAC6 information with the EU on a quarterly basis, as originally envisaged. The reporting of such arrangements and sharing of this information are powerful tools to tackle tax avoidance, and the absence of adequate information exchange threatens tax transparency and, as a result, erodes the tax base.
Stephanie Pong, London Trainee Solicitor, contributed to the drafting of this alert.
 International Tax Enforcement (Disclosable Arrangements) Regulations 2020.