HMRC has recently released final regulations in respect of the sixth version of the Directive on Administrative Cooperation (DAC6), an EU directive that will be implemented in the UK. DAC6 is a response to the OECD’s Mandatory Disclosure Rules aiming to strengthen tax transparency across the EU and counter aggressive tax planning. HMRC has confirmed that its commitment to tax transparency reporting will not be diminished following the UK’s withdrawal from the EU and that tax transparency reporting will apply irrespective of when the UK withdraws from the EU.
The regulations require ‘intermediaries’ and, in some circumstances, taxpayers to report details of cross-border arrangements to HMRC where those arrangements fall within five prescribed hallmarks. The rules apply to arrangements implemented or made available since 25 June 2018. Penalties will be imposed for non-compliance, so it is important for organisations to consider now how they will comply with these regulations.
The rules require retrospective reporting fin relation to arrangements from 25 June 2018 to 30 June 2020 and an on-going 30 day reporting requirement from 1 July 2020. Due to COVID-19 these dates have been deferred by six months.
The definition of an intermediary is widely drafted to include “any person that designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement”. HMRC refers to such intermediaries as ‘promoters’.
The definition also extends to any person that provides “aid, assistance or advice” with respect to a cross-border arrangement. This includes service providers, such as banks, consultants, accountants and law firms that advise on a reportable arrangement that is implemented by another person. It is possible for a service provider to argue that it is not an intermediary on the basis that it did not and could not reasonably be expected to know that it was involved in a reportable arrangement. It may, however, be required to provide evidence to support this position.
HMRC has released their response to the consultation that took place in 2019 and have recently published their guidance. Their response to the consultation and guidance confirms that where multiple intermediaries are involved in an arrangement, only one intermediary is required to submit a report. HMRC will issue an Arrangement Reference Number, which must be communicated to the other intermediaries involved in the arrangement. There are complex rules regarding deadlines, obtaining evidence of reporting, and ensuring that all information is properly reported. It may be that the same arrangement must be reported several times where the intermediaries involved have access to different information.
There is a narrow exemption from reporting where an intermediary has legal professional privilege. This does not, however, exempt the intermediary from reporting any aspects of the arrangement that are not protected by legal professional privilege.
The five hallmarks set out the characteristics of cross-border arrangements that are caught by DAC6. They are split into generic and specific hallmarks, and some hallmarks also require the arrangement to meet the ‘main benefit test’. This test is broadly met where a main benefit of the arrangement is to obtain a tax advantage and that advantage is not consistent with the policy objectives of the applicable law. Further detail on the hallmarks can be found here.
Key dates and reporting
HMRC has recently confirmed that it will defer the first reporting deadlines under DAC6 by six months in light of Covid-19. See our article on our Covid-19 hub here.
Although this gives businesses some breathing space, we would still recommend businesses continue to progress with their DAC6 compliance, particularly with the retrospective exercise from 25 June 2018. Some other EU member states have also taken the option to defer (but not all) therefore businesses may still need to consider their reporting obligations in other EU jurisdictions under the previous deadlines which are fast approaching.
The regulations impose strict penalties for failure to comply. For intermediaries, these can be as high as £600 per day for each day of non-compliance. For taxpayers, the maximum penalty is £10,000 for each offence. In addition, the First-tier Tribunal has the power to increase these penalties to £1 million.
HMRC has confirmed that an arrangement will not be reportable if the tax consequences of that arrangement are in accordance with the intention of the legislation upon which the arrangement relies. For example, investing in an ISA will not be reportable even though it gives rise to a tax advantage. Reporting may still be required, however, if the arrangement is part of a wider cross-border transaction that does satisfy a hallmark.
HMRC guidance has recently been released which provides some clarification, however there are areas of the legislation that are complex and open to interpretation where no guidance has been provided.
How Smith & Williamson can help
We are assisting businesses with analysing past arrangements and preparing for future reporting by:
- Identifying whether the business could be an intermediary for the purposes of DAC6;
- Conducting an impact assessment to determine the size of the impact and identify functions or arrangements that might be caught;
- Assisting in identifying the reportable arrangements entered into during the retrospective period and on-going arrangements;
- Reviewing current processes, assisting with the implementation of a reporting framework to identify reportable arrangements to ensure business have an efficient process in place to identify and collate reportable information; and
- Providing training for relevant staff;
- Assist with the recording of transactions on our tracking and reporting tool;
- Report on behalf of organisations
Find out more about Directive on Administrative Cooperation 6 (“DAC6”) and how Smith & Williamson can assist your organisation by visiting our services page here
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication. Details correct at time of publication.