HMRC consults on cross-border tax disclosure rules

The government is consulting on new rules required to implement an EU directive that will require the disclosure to HMRC of certain cross-border arrangements that could be used to avoid or evade tax

From 1 July 2020 an EU directive known as DAC 6 will require taxpayers and their advisers to report details of certain cross-border arrangements that could be used to avoid or evade tax to HMRC.

The aim of the consultation is to clarify HMRC’s intended approach for businesses, as it moves to finalise the regulations, which will be implemented regardless of the outcome of Brexit negotiations. The draft regulations will require promoters, intermediaries and taxpayers to report details of certain types of cross-border arrangements to HMRC, where those arrangements meet certain hallmarks or criteria, which are listed in an appendix.

These hallmarks include confidentiality, remuneration arrangements, the use standardised documentation, loss buying, converting income to capital, the transfer of assets, obscuring beneficial ownership, and hard to value intangibles, among others. 

HMRC will share information received in these reports with other EU member states, who will in turn share reports they receive with HMRC. This will provide HMRC with early information about new schemes which could be used to avoid or evade tax, enabling timely compliance action to be taken.

The DAC provides that a cross-border arrangement is reportable if it meets one or more of the hallmarks set out in the annex. An arrangement is a cross-border arrangement if it concerns either more than one EU member state, or an EU member state and a third country.

HMRC says whether or not an arrangement ‘concerns’ multiple jurisdictions will be crucial in determining whether there is a reportable cross-border arrangement. HMRC is of the view that in order for the arrangement to ‘concern’ multiple jurisdictions, those jurisdictions must be of some material relevance to the arrangement.

The consultation also looks at definitions of a ‘relevant taxpayer’ and the circumstances that would   trigger a reporting event.

The DAC definitions envisags two distinct types of intermediaries: those who design, market, organise, make available for implementation or manage the implementation of a reportable cross-border arrangement (‘promoters’), and those who provide aid, assistance or advice in relation to the designing, marketing, organising or implementing of reportable cross-border arrangements (‘service providers’).

Regardless of whether an intermediary is a ‘promoter’ or a ‘service provider’, the reporting obligation is fundamentally the same: they must make reports about any reportable cross-border arrangement that they are involved in.

However, there are two key differences. A ‘service provider’ can argue that they are not an intermediary because they did not know and could not reasonably have been expected to know that they were involved in a reportable arrangement, and so the obligation to report does not arise in respect of that person.

Secondly, there is an additional reporting trigger for service providers which requires them to report within 30 days of providing aid, assistance or advice in respect of a reportable cross-border arrangement.

The DAC applies to all taxes of any kind levied by a member state, or its administrative subdivisions, apart from VAT, customs duties, excise duties covered by other EU legislation on administrative cooperation, and compulsory social security contributions.

However, for the purposes of defining ‘tax advantage’ in the regulations, tax is defined more broadly, and does not only include taxes levied by EU member states, but also equivalent taxes levied in other jurisdictions. This means that the tax advantage derived from any arrangement does not have to be realised in the EU, and so an arrangement could still generate a tax advantage, and meet the main benefit test even if the tax advantage arises in a non-EU member state.

Where multiple intermediaries or relevant taxpayers have an obligation to make reports under these regulations, or the legislation of other EU member states implementing DAC 6, they will be exempt from the obligation to file a report if they have evidence that the reportable information that they would have been required to report has been reported by another intermediary or relevant taxpayer.

In order for the exemption to apply, the intermediary or taxpayer will need to satisfy themselves that a report has been made, and that the information that they would have to report has already been reported. HMRC currently is of the view that where an intermediary is provided with a correct arrangement reference number, that will be sufficient evidence that a report has been made. However, the potential reporter will also need to be satisfied that the information they would report has been captured in the report made.

The regulations will come into force on 1 July 2020 and will apply to reportable cross-border arrangements which are made available for implementation on or after 1 July 2020 or  which are ready for implementation on or after 1 July 2020 , in respect of which an intermediary provides aid, advice or assistance on or after 1 July 2020, in relation to designing, marketing, organising, making available for implementation or managing the implementation of the arrangements, or the first step in the implementation of which took place on or after 25 June 2018.

Thus the regulations require reporting of any reportable arrangement where the first step was taken after the date from which DAC 6 applied (25 June 2018), even where that step was taken prior to the regulation entering into force (1 July 2020).

HMRC says it recognises that this reporting requirement poses certain challenges for intermediaries and relevant taxpayers, particularly where the first step was taken prior to the publication of the regulations and guidance. Therefore, it would not charge penalties where a person has a reasonable excuse for the failure under the regime.

Where a failure relates to an arrangement where the first step of the implementation predates the publication of this consultation document and the draft regulations, and the failure was due to a lack of clarity around the obligations or interpretation of the rules, which could not reasonably have been inferred from the DAC itself, it is likely that the person will have a reasonable excuse for the failure. Where a person has a reasonable excuse, no penalty will be due.

The consultation closes on 11 October.

Draft regulations: implementation of disclosable arrangements

Pat Sweet | 24-07-2019

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