Rules on cross-border tax disclosure under DAC 6 refined

The government has published legislation requiring taxpayers and their advisers to disclose details of certain cross-border arrangements to HMRC as part of moves to crack down on tax avoidance, but has watered down the original penalty regime

The rules, known as DAC 6, are the latest attempt by the EU to crack down on the use of aggressive tax avoidance across EU member states, and are set to come into force this July.

The International Tax Enforcement (Disclosable Arrangements) Regulations 2020 were published in draft in July 2019 in the UK. They implement EU Directive 2018/822, which amends Directive 2011/16/EU (on administrative cooperation in the field of taxation), more commonly known as DAC 6.

The regulations will provide HMRC with early information about cross-border arrangements that could potentially be used to avoid or evade tax, allowing it to better target its compliance activity, and deter people from entering into abusive arrangements in the first place.

Arrangements will be reportable if they meet any of a number of distinctive features, referred to in the directive as ‘hallmarks’, sometimes seen in arrangements used to avoid or evade tax.

There is a 30-day window for a report to be made. The information received from these reports will be shared with other tax authorities, who will in turn share the information they receive.

The primary reporting obligation will fall on intermediaries, which includes those who design and market cross-border arrangements, and those who provide aid, assistance or advice in respect of such arrangements.

The report will normally be made to the tax authorities of the country where the intermediary is resident for tax purposes. That tax authority will then share the report with tax authorities in other EU member states so that they can identify any potential tax risks in their jurisdictions.

The government consulted on draft legislation over summer 2019 and has now amended the legislation to ensure the rules are effective and proportionate.

In particular, HMRC says it recognised concerns raised during the consultation about the penalty regime, the risk of over-reporting, and the interaction of the rules with legal professional privilege (LPP).

Penalty regime

While noting it is limited by legal obligations to implement the directive faithfully, HMRC has made a number of changes, including amending the penalty regime to ensure it is proportionate and is flexible enough to deter non-compliance, while not unduly penalising those who make genuine mistakes.

The default position will be a one-off penalty of up to £5,000, with daily penalties only applying in more serious cases, and subject to the determination of the First Tier Tribunal (FTT).

The amended regulations limit the scope of ‘tax advantage’ to only taxes covered by the directive, addressing a particular concern raised by a number of stakeholders around ensuring the rules are proportionate.  They have also been amended to ensure that the same intermediary does not have an obligation to report in multiple jurisdictions.

Regarding the territorial scope of the draft rules, the government agreed that in certain situations the scope was too wide.

New definitions of UK intermediary and UK resident taxpayer have been introduced in the regulations to address this point. This will ensure that the regulations do not apply to intermediaries without a connection with the UK, minimising burdens on business as far as possible.

There was a strong view that the structure of the rules as originally conceived would be difficult for lawyers to operate and risked threatening legal privilege, or putting lawyers in an impossible position where they would either have to fail to comply with the regulations or breach privilege.

A significant number of respondents also commented that it would be difficult for intermediaries to know when a reporting trigger was met. This was because terms used in the regulations such as ‘made available’ and ‘first step’ were potentially ambiguous.

HMRC says it has ensured that the rules are compatible with legal privilege and will work with stakeholders on the guidance to ensure it does not inadvertently risk undermining privilege.

HMRC states that the new regulations are expected to have a significant impact on businesses, although it has not so far quantified the costs, which will be assessed more fully once they are operational.

There will be delivery costs for HMRC to implement this measure. IT costs are still being finalised, but initial estimates are £7.7m, and there will also be resource costs to HMRC estimated to be around £3.5m per year.

The regulations come into force on 1 July 2020. Reports for arrangements entered into from 25 June 2018 to 30 June 2020 will be due by 31 August 2020.

HMRC has committed to publishing guidance before July, and will work with interested stakeholders on this. The key areas identified include clarifying when an arrangement concerns multiple jurisdictions; when an arrangement is made available; when aid, advice or assistance is ‘given’; how reporting will work in practice where multiple intermediaries are involved; and how the main benefit test will be interpreted.

The guidance will provide examples of how the rules will apply in different circumstances, recognising that the application of the rules will often depend on the facts of a particular arrangement.

International Tax Enforcement (Disclosable Arrangements) Regulations 2020

Summary of DAC 6 consultation responses

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