Following the agreement of the EU/UK Trade and Cooperation Agreement (the “Brexit Deal”), HMRC has unexpectedly announced a substantial restriction to the way in which DAC6 will be applied in the UK. Although the law has effect from 11 p.m. on 31 December 2020, the changes will operate retrospectively and also apply to prior arrangements that would otherwise have needed to be reported. The restrictions should materially simplify DAC6 compliance for UK businesses and their UK intermediaries.
In summary, in the Brexit Deal the UK committed to meet the minimum standards set by the OECD in relation to the exchange of information concerning potential cross-border tax planning arrangements, rather than the minimum standards on tax transparency set by the European Union and given effect by DAC6. As a result, surprisingly, and contrary to previous indications, DAC6 will no longer apply in the UK as envisaged.
By way of a brief reminder, DAC6 (sometimes referred to as “MDR” – the Mandatory Disclosure Rules) requires the identification and reporting of cross-border arrangements involving at least one EU Member State or the UK and that feature one or more “hallmarks” that the EU consider may be indicative of potentially aggressive tax arrangements.
The UK Government has now amended the UK’s DAC6 implementing regulation1 to remove almost all the hallmarks (as well as the main benefit test) from the scope of the reporting obligation in the UK. Accordingly, the reporting obligation now only applies to those arrangements that meet the “Category D” hallmarks (broadly, arrangements that are designed to undermine the reporting requirements under the automatic exchange of information pursuant to U.S. FATCA or the Common Reporting Standard and/or disguise the beneficial ownership of assets).
In addition, HMRC has also announced that the UK will (during the course of 2021) consult on and implement the OECD’s 2018 MDR as soon as possible. This will replace DAC6 enabling the UK to transition from EU to international standards on tax transparency.
What this means:
In short, any transactions that may previously have been identified as reportable in the UK pursuant to any of the hallmarks other than category D will no longer be reportable by UK intermediaries and it will not be necessary for UK intermediaries to consider category A, B, C or E hallmarks in respect of future arrangements. It will remain necessary for UK intermediaries to consider the potential application of the category D hallmarks.
These changes do not alter the reporting obligations of EU intermediaries, who must continue to consider the full range of DAC6 hallmarks. Consequently, arrangements may still need to be reported to an EU tax authority if a cross-border arrangement involves an EU intermediary. Particular care ought to be taken where arrangements involve both UK and EU intermediaries (or where a single intermediary advises out of the UK and an EU Member State) as EU intermediaries may no longer be able to take comfort from a UK finding that arrangements are not reportable.
Footnotes
1) SI 2020/25 (The International Tax Enforcement (Disclosable Arrangements) Regulations 2020
