HM Revenue & Customs confirmed on 4 January that, following conclusion of the Free Trade Agreement with the EU, the UK will no longer be applying the EU’s DAC6 (Directive 2018/822) mandatory disclosure regime that imposes mandatory reporting of cross-border arrangements in its entirety.
Despite the fact the UK was leaving the EU, the UK implemented DAC6 into domestic law, requiring intermediaries such as tax advisers, accountants and lawyers to report any cross-border tax planning schemes in which they are involved to their national tax authority, if the scheme bears ‘hallmarks’ showing it to be potentially ‘aggressive avoidance’.
EU Member States and non-member jurisdictions that adopted DAC6, are to exchange this information through a central database. DAC6 requires EU intermediaries to file information on Reportable Cross Border Arrangements to their home tax authorities. The first disclosures were due to be made by 30 January 2021.
The new Free Trade Agreement signed between the UK and the EU on 24 December states: “A party shall not weaken or reduce the level of protection provided for in its legislation at the end of the transition period below the level provided for by the standards and rules which have been agreed in the OECD at the end of the transition period, in relation to (a) the exchange of information…concerning… potential cross-border tax planning arrangements.”
The UK government has therefore decided to restrict reporting only to those arrangements that would be reportable under the under the OECD’s Model Mandatory Disclosure Rules (MDRs) on Common Reporting Standard (CRS) Avoidance Arrangements and Opaque Offshore Structures.
As a result, the UK regulations that implement DAC6 will be amended to remove hallmark categories A, B, C and E, and the scope of DAC6 reporting will be significantly reduced. This applies both for ‘historic’ arrangement reporting – steps taken after 25 June 2018 for which the reporting window had not yet opened – and for ‘new’ arrangements.
Only those arrangements that meet hallmarks under Category D of DAC6 will need to be reported in the UK after the end of the transition period, which broadly covers arrangements that involve attempts to conceal income or assets, or to obscure beneficial ownership. These will still need to be considered for reporting on an ongoing basis.
As an interim measure, the UK government issued the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No. 2) (EU Exit) Regulations on 30 December to amend the regulations so that they only apply to arrangements falling under the category D hallmarks. These are arrangements designed to undermine tax reporting under common reporting standard and transparency rules and are split into two types:
- Arrangements that have the effect of undermining reporting requirements under agreements for the automatic exchange of information;
- Arrangements that obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.
This change applies retrospectively so no disclosures will need to be made for any arrangements that fall into one of the other hallmarks set out in DAC6. Reporting obligations apply to arrangements where the first step was entered into on or after 25 June 2018. Reports were due to be made in respect of these arrangements by 28 February 2021, although an earlier reporting deadline of 30 January 2021 applied to:
- Arrangements that were made available for implementation, or ready for implementation, or where the first step in the implementation took place between 1 July 2020 and 31 December 2020; and
- Arrangements in respect of which a UK intermediary provided aid, assistance or advice between 1 July 2020 and 31 December 2020.
The UK is to consult on and implement the OECD’s MDR as soon as practicable to replace DAC6.