Directive on Administrative Cooperation 6 (“DAC6”) and the Mandatory Disclosure Rules

DAC6 is a response to the OECD’s Base Erosion and Profit Shifting project, and aims to strengthen tax transparency across the EU and counter aggressive tax planning. It also incorporates the OECD’s Mandatory Disclosure Rules. HMRC has confirmed that these regulations will apply whether or not the UK withdraws from the EU, but has not confirmed how they will operate outside the framework of the EU.

DAC6 1920 (2)

Requirements

The new regulations require organisations, either in their capacity as an intermediary or as a taxpayer, to report certain cross-border arrangements to HMRC where they meet at least one of five prescribed hallmarks. The rules are retrospective and apply to arrangements implemented from 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.


Click here for further details on these rules.

The challenge

HMRC must follow the EU Directive when implementing the UK legislation but the final UK regulations have not yet been released. Given the retrospective nature of the regulations it is nevertheless necessary for organisations to plan now on how to comply.

As the Directive applies to all EU Member States and the rules apply to cross-border arrangements, organisations may need to know how the legislation differs in other EU countries, which adds an extra layer of complexity and a greater burden on tax and finance teams.

How Smith & Williamson can help

Smith & Williamson is assisting organisations in understanding the rules, analysing past arrangements and preparing for future reporting. This includes:

Impact assessment
  • Consider impact as intermediary/taxpayer
  • Identify functions/products that might be caught
  • Assess size of impact
  • Consider potentially reportable historic transactions
  • Plan the approach to managing reporting
Identify processes
  • Consider existing processes and necessary enhancements
  • Record relevant transactions since June 2018
  • Consider how relevant information should be collected & analysed
  • Capitalise on existing information reporting processes
Agree internal responsibilities
  • Identify stakeholders
  • Agree who should take responsibility for reporting
  • Consider appropriate sign-offs
  • Carry out appropriate training
  • Arrange reporting to taxpayers by intermediaries
Implement reporting frameworks
  • Structured data collection framework
  • Implement reporting tool to monitor, identify and capture arrangements
  • Ensure an appropriate audit trail is created
  • Use of the reporting schema
Monitor legislation developments
  • Monitor UK legislation and guidance releases
  • Consider interaction with other EU countries
  • Industry association updates
Data capture & Reporting
  • Provide a tool to gather data to create an audit trail and prepare for reporting
  • Advice on whether an arrangement is reportable
  • Report on behalf of organisation where legislation permits

Frequently Asked Questions

Is HMRC extending the reporting deadlines due to COVID-19?

Yes, HMRC has confirmed that it will defer the reporting deadlines by six months. The details of the deferral can be found on our COVID hub.

Some EU jurisdictions, however, have opted for different deferral dates. Businesses with multi-jurisdictional offices should take this into account and ensure they are ready for reporting in each jurisdiction by the respective deadlines.

We are looking to start our DAC6 compliance project. What approach should we be taking?

Businesses should conduct an impact assessment to determine how DAC6 applies to their activities. This will involve a retrospective exercise to review transactions in which they have been involved since 25 June 2018 to determine whether or not they are reportable. On completion of the impact assessment, businesses should be able to determine the processes required to comply with the 30-day reporting requirement coming into force on 1 January 2021.

Businesses should also consider their internal arrangements and transactions that have taken place since 25 June 2018.

To find out more, please contact a member of our team who will be happy to advise. Find out more about our services.

How is reporting conducted?

Reports will be submitted using an XML upload on the HMRC portal. The HMRC portal is currently not available, however HMRC has confirmed that it will be made available ahead of the new deferred deadlines.

Businesses should consider using a tracking and reporting tool to assist with their review and ongoing compliance. The tool should be used to create an audit trail, which is equally important for both reportable and non-reportable arrangements. If HMRC were to enquire into an arrangement that a business did not report, the audit trail would provide supporting evidence for the decision not to report. The complexity required from a tracking and reporting tool will depend on the extent to which your businesses is impacted by DAC6. An in-house solution may be sufficient for some businesses, whereas other businesses may consider using an external tool.

To find out more, please contact a member of our team who will be happy to advise. Find out more about our services.

The business falls into the definition of an intermediary but I don’t think we are involved in any reportable arrangements.

Businesses should undertake a review to confirm that they are not involved in any reportable arrangements. Even if the business does not provide tax advice on an arrangement, it may become aware of the tax aspects of an arrangement when providing other advice. For example, a corporate finance business providing M&A advisory services is likely to become aware of the tax aspects of the structure of a deal. If any aspects of the deal fall within the DAC6 Hallmarks, the corporate finance firm may have an obligation to report.

It is important for businesses to document their review. If HMRC were to enquire into the business’s DAC6 compliance, this document could be provided as supporting evidence. As business operations change and develop, the DAC6 review should be refreshed.

Intermediaries should also consider their internal arrangements to determine whether or not reporting is required as a taxpayer.

To find out more, please contact a member of our team who will be happy to advise. Find out more about our services.

Do I need to train my staff?

The DAC6 regulations are complex, so educating and training staff is essential.

From experience, we recommend that front office employees who are involved in and have knowledge of the arrangements and services provided to clients should receive training. Businesses may also identify other key employees who require training. Training should be practical and tailored to the relevant hallmarks for that business line.

To find out more, please contact a member of our team who will be happy to advise. Find out more about our services.

Do I need to report in more than one jurisdiction?

In the UK, an exemption applies where an intermediary from an EU jurisdiction reports the arrangement to an EU tax authority. For the exemption to apply, an arrangement reference number must be obtained from the reporting intermediary and kept on file.

It is important to note that many jurisdictions have different reporting requirements and reporting may therefore be required in the UK if the report made in another jurisdiction does not include all the information required by HMRC.

To find out more, please contact a member of our team who will be happy to advise. Find out more about our services.

I don’t fall into the category of an intermediary; do I need to take any action?

Even if a business does not fall within the definition of an intermediary, reports submitted by its advisers may include information on the business. The business may also have a reporting obligation in its capacity as a taxpayer.

Businesses may ask their advisers if any of their DAC6 reports will include information about them. If a report is made on an arrangement in which the business participated, the business is required to include the reference number in its annual tax return.

There are also some circumstances in which the reporting obligation falls on the business as a taxpayer. This includes arrangements where the adviser is tax resident outside the UK or EU, or in-house arrangements where no intermediary is involved.

To find out more, please contact a member of our team who will be happy to advise. Find out more about our services.

 

Please contact us for more information and assistance with DAC6.

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