HM Revenue & Customs confirmed on June 25, 2020, that the United Kingdom will adopt a European Union measure to delay the first reporting requirement under EU Council Directive 2018/822, the sixth amendment to the EU Directive on Administrative Cooperation (also known as DAC 6), by six months. This means that the first UK DAC 6 reports will now be due in early 2021.
WHAT IS DAC 6?
DAC 6 is a European Union-wide reporting framework requiring persons who design and implement certain tax arrangements on behalf of their clients (referred to as “intermediaries”) to make mandatory reports to the tax authority. DAC 6 applies in the United Kingdom, which is currently in a transition period following its departure from the EU.
Intermediaries are persons who design or make available for implementation “reportable cross-border tax arrangements.” This includes accountants, tax advisors, and lawyers, and in some cases could potentially cover groups other than advisers. A second category of intermediary brings persons who provide aid, assistance, or advice in the implementation of a reportable cross-border tax arrangement—such as lawyers acting on an “implementation only” mandate and other professional advisors and service providers who may not be providing tax advice—within the scope of DAC 6.
An arrangement will only be reportable if one or more “hallmarks” apply to it. Although many of the hallmarks should only apply where the main benefit of a transaction can reasonably be expected to be the obtaining of a tax advantage, some of the hallmarks apply to arrangements regardless of the motive of the transaction. This means that DAC 6 reporting could potentially apply to normal commercial transactions that are not primarily tax motivated—for example, some payments to entities located in jurisdictions such as the Cayman Islands or other jurisdictions considered by the European Union or Organisation for Economic Co-operation and Development (OECD) to be uncooperative and certain transactions involving the transfer of intellectual property or that rely on transfer pricing safe harbours.
DAC 6 does not apply to wholly domestic arrangements. To trigger a reporting obligation, a cross-border tax arrangement must involve parties in at least two jurisdictions, at least one of which is an EU member state (or, as it applies in the United Kingdom, the United Kingdom). The reporting obligation will normally arise in the United Kingdom or an EU jurisdiction where the intermediary required to report is established, however non-UK or EU entities many be required to report if they are supervised by certain UK or EU regulatory bodies. This is a complicated area, and entities which consider they may be affected should seek professional advice.
Although the primary obligation to report falls on the intermediary, in certain circumstances—for example, where the intermediary is prevented from making a report by reason of legal professional privilege—the reporting obligation may fall on the client. Clients should also be aware that DAC 6 reports may require the reporting of sensitive information to tax authorities, and so should consider the implications of these measures carefully.
DELAY OF DAC 6 REPORTING
The first UK DAC 6 reports were due to be made by August 31, 2020, for reportable arrangements the first step in the implementation of which took place between June 25, 2018, and June 30, 2020. For arrangements made available for implementation or which are ready for implementation on after July 1, 2020, the first reports were due to be made within a period of 30 days of the arrangement becoming so available or ready.
Due to the ongoing coronavirus (COVID-19) pandemic, the European Commission proposed a delay to the commencement of DAC 6 reporting, and on June 19, 2020, the European Parliament voted in favour of allowing (but not requiring) EU member states (and the United Kingdom) to delay the commencement of reporting by six months.
The United Kingdom has confirmed that it will adopt this measure to delay the first UK DAC 6 reports. HM Revenue & Customs (HMRC) has issued guidance confirming that the following deadlines for reporting will now apply.
- For arrangements where the first step in the implementation took place between June 25, 2018, and June 30, 2020, reports must now be made by February 28, 2021.
- For arrangements which are made available for implementation, or which are ready for implementation, or where the first step in the implementation takes place between July 1, 2020, and December 31, 2020, reports must be made within the period of 30 days beginning on January 1, 2021. This also applies to arrangements where a UK intermediary provided aid, assistance, or advice within this period.
- Arrangements that become reportable on or after January 1, 2021 must be reported as normal within the relevant 30-day reporting period.
- Where periodic reports are required in relation to marketable arrangements, the first such report must be made by April 30, 2021.
A number of EU jurisdictions have either confirmed they will adopt the European Union’s measure to delay the commencement of DAC 6 reporting or that they intend to do so shortly, including Belgium, Ireland, and Luxembourg. The German legislator has authorized the German Ministry of Finance to issue a circular by which the reporting obligations would be delayed. While it is expected that such circular will be published, to date no such circular has been issued.
The EU measure contains an option for a further three-month delay, depending on the evolution of the COVID-19 pandemic.
This is a welcome delay to the commencement of DAC 6 reporting in the United Kingdom, particularly as the penalties for noncompliance with the DAC 6 rules are high. Noncompliance with reporting obligations can result in penalties of £600 per day, and the UK tax tribunal has powers to impose penalties of up to £1 million. Affected businesses that have not already done so should consider the impact of DAC 6 on their internal procedures and evaluate the need for new internal processes to ensure compliance.
Read the HMRC’s updated guidance confirming the delay.
Read the details of the European Commission’s measure.