Consultation on draft regulations to implement DAC 6
October 3, 2019
The government is consulting on draft regulations to implement Directive (EU) 2011/16—which requires taxpayers and their advisers, from 1 July 2020, to report details of certain cross–border arrangements that could be used to avoid or evade tax to HMRC. Ray McCann, partner at Joseph Hage Aaronson LLP, discusses, among other things, the background to the draft regulations and the type of arrangements covered.
What is the background to the publication of these draft regulations? What type of arrangements are covered?
The UK has been one of the leading countries in introducing measures intended to deter and counteract, in particular, high-value and sophisticated tax avoidance arrangements. The UK scheme, disclosure of tax avoidance schemes (DOTAS), was introduced in 2004 and has since been revised and expanded over the years. Other countries have followed suit with a very similar DOTAS arrangement in Ireland, although both the UK and Irish DOTAS schemes were developed from the ‘Abusive Tax Shelter’ rules introduced in the US.
DOTAS is restricted to arrangements that have an avoidance impact in the UK—albeit that transactions involving an offshore jurisdiction or marketed from offshore could still be caught.
More widely, over the past decade, the European Parliament and European Commission together with the Organisation for Economic Co-operation and Development (OECD)and EU Member States, in particular the UK, have worked to develop a coordinated approach to cross-border tax avoidance. In 2011, Directive fEU) 2011/16, the EU Directive on Administrative Cooperation (DAC) was agreed and has been amended on many occasions thereafter. On 25 May 2018, the European Commission again amended DAC by Directive (EU) 2018/822 and Member States have until 31 December 2019 to implement the terms of the most recent amendment, commonly referred to as ‘DAC 6’.
Overall, it is fair to say that anyone familiar with DOTAS will recognise a great deal of what is within the scope of the draft regulations, and while the DAC 6 scheme largely follows DOTAS, reflecting the UK’s input to the drafting of the arrangements, there are important differences.
An arrangement will be within scope of the draft regulations where it is a ‘cross-border arrangement’ (CBA). This is an arrangement that involves more than one EU Member State or an EU Member State and a ‘third country’. In addition, the participants to the arrangement must be resident in different countries or have a presence in more than one jurisdiction.
To be a CBA for these purposes, there must be two or more jurisdictions that are relevant to the operation of the arrangements. So it would be unlikely that an intermediary based in the Isle of Man, for example, who designs tax schemes effective only in France would be caught as an intermediary for that reason alone where the Isle of Man was otherwise irrelevant to the arrangements. HMRC uses an example that would make clear that a tax scheme used, by say, a UK permanent establishment of a US corporation (or other Member State company), would be outside the draft regulations where the scheme had no implications for the US or any other jurisdiction (assuming that was the case or indeed possible).
Like DOTAS, a number of hallmarks are proposed in categories A to E and these will determine whether a CBA is reportable. These broadly follow a similar approach to DOTAS and include a main benefit test, confidentiality, fees related to the tax advantage and so on.
The categories also include specific types of arrangements that must be reported, such as loss buying, for example.
In all cases, there must be a main benefit tax advantage which is worded on similar lines to DOTAS.
Who will need to make returns under the draft regulations?
DAC 6 imposes two obligations on who must disclose. The primary obligation falls on a very broadly defined intermediary (‘promoter’ in UK terms) that may also include those assisting or advising on the CBA. There is a secondary obligation on a ‘relevant taxpayer’ but special rules apply where legal privilege is involved.
An ‘intermediary’ for these purposes is any person concerned with the design, marketing, and organisation or making available of the CBA—so again familiar. But it also includes any person who is not within the specific category of intermediary but who nevertheless provides such services so as to assist an intermediary or should reasonably know that they are providing such services—these are referred to as ‘service providers’. They are excluded from a reporting obligation where it is reasonable that they did not know or could not reasonably be expected to know that they were assisting or advising on a CBA in which a reporting obligation could fall on them.
Those actually involved in the design or marketing, etc are not able to claim that they did not know or could not reasonably have known.
There are other conditions, the most important of which is that an intermediary must be resident in a Member State.
But it is clear that both qualified and unqualified tax advisers will be within the scope where they are so resident.
It is important to note that simply because you are aware (or later become aware) of a CBA does not mean that you will assume a reporting requirement as a service provider for that reason alone.
Legal privilege was a hotly debated issue in 2004 in the context of DOTAS and it is somewhat odd that the consultation envisages the possibility of a similar reporting requirement on lawyers as was initially suggested by the Inland Revenue (as it then was) at the time of DOTAS, ie that lawyers could report factual information.
However, in the draft regulations as drafted, where legal privilege is in point, lawyers will be able to pass any reporting obligation onto any non-lawyer intermediary.
Where legal privileged information is in point but there is no intermediary within the scope of the reporting requirement at all, the obligation will then fall on a ‘relevant taxpayer’. This basically means the person able to benefit from the arrangements. Again, familiar terms are used here such as ‘made available’ and it is intended to catch any person to whom a CBA has been marketed whether it has been implemented at that point or not.
What is provided about the practicalities of making a return?
Perhaps inevitably, the reporting triggers and requirements are more complex than is the case with DOTAS.
Where the intermediary, etc, is UK-based, the disclosure must be made to HMRC.
No disclosure to HMRC will be required where the UK intermediary or service provider has made a disclosure to another Member State.
Where there is more than one intermediary, no report is required where a disclosure has been made in respect of the same CBAs by another intermediary, provided that evidence is held that this is the case.
In terms of the disclosure, the DAC sets out the main requirements. These include;
- the identification of the intermediaries and relevant taxpayers
- what hallmarks are considered to apply
- details of the arrangement, including project names and so on but not commercial, industrial or professional secrets
- the date the first implementation step is or will be made
- the relevant statutory provision
- the value of the transaction
- taxpayer identification information
This information will be shared by HMRC with the other relevant Member State(s).
Disclosure reports are required to be sent to HMRC within 30 days, at the earliest, from when the CBA is made available, ready to be implemented or the first step is taken.
Service providers will have a separate additional deadline of 30 days from the point they provide the assistance or advice.
There is a special transitional reporting date where the first step in a CBA is taken after 25 June 2018 but before 1 July 2020. In this case, the report must be made by 31 August 2020.
Where the CBA is marketable, there will be a further ongoing reporting requirement that will mean that intermediaries must notify HMRC every three months of, in effect, new sales.
As with DOTAS, HMRC will issue a reference number to each intermediary who must in turn provide that number to each relevant taxpayer within a 30-day period.
Relevant taxpayers must report annually for each accounting period or year of assessment that they participate in the CBA. This is likely to be any accounting period or year of assessment in which a tax advantage is derived from the CBA.
It should be noted that these are the suggested timings by HMRC, the rules may be different in other Member States.
HMRC has not, as yet, suggested any specific form of report but this will no doubt emerge in due course. In the meantime, HMRC has said that taxpayer disclosure should be included in the ‘white space’ on a self-assessment return. This is oddly informal for such an important measure and from a tax administration perspective it will prove unacceptable and risky for HMRC’s compliance efforts. It differs significantly from the way in which DOTAS Scheme Reference Numbers (SRN) operate. HMRC should reflect on the fact that even with the SRN arrangements, HMRC has still missed aggressive tax schemes, see for example the case of Revenue and Customs Commissioners v Charlton and others  UKFTT 770.
Are there any pitfalls?
It is inevitable that while DAC 6 is very similar to DOTAS, there are potential traps. DOTAS and DAC 6 will run in parallel and the disclosure requirements are not wholly aligned.
Perhaps at this stage, the most problematic aspects will relate to service provider intermediaries. The potential requirement here is not entirely aligned with DOTAS and the broad nature of intermediary is likely to require some time to settle down fully, especially for those on the periphery of a CBA.
It is possible, however, that difficulties may be encountered in determining whether an arrangement is in fact a CBA, especially for service providers.
What are the penalties for non-compliance?
The penalties are modelled on DOTAS and are similar in structure to the penalties applicable to late returns in the UK generally. There is thus an initial period of failure that will attract a £600 daily penalty where there is a failure to comply with the main disclosure and reporting obligations. Where the failure continues after the initial penalty is imposed, further £600 daily penalties can be imposed.
Failing to meet any other obligation will incur a penalty of £5,000.
Relevant taxpayers face a £5,000 penalty for failing to make an annual report, rising to £10,000 where there is habitual failure.
How would the draft regulations interact with the rules on DOTAS? Might the same arrangements need to be disclosed under both sets of rules?
The rules will run parallel to DOTAS, but they will not be mutually exclusive. In some cases, a disclosure may be required in accordance with both DOTAS and DAC 6. It is of course possible that as time goes on there will be some streamlining, but the development of DOTAS would suggest that further tightening of the rules and not relaxation is likely to be the direction of travel.
How would the draft regulations be affected by a no–deal Brexit?
DAC 6 is due to come into effect in July 2020 at which point the UK is, on current government pronouncements, likely to have left the EU. Irrespective of whether the UK leaves with a deal, transactions involving the UK will be within scope of DAC 6 but only so far as intermediaries based in continuing Member States are concerned.
DAC is a hugely important EU project that is supported by the OECD and has had significant support from the UK. It is also a key aspect of our commitment to the wider base erosion project (BEPS), It is difficult to imagine that the UK would simply walk away, so even under a no-deal scenario it is possible that the UK will look to adhere to some or all of the DAC or indeed the UK could introduce its own rules on cross-border tax avoidance arrangements. It should be remembered that the UK is part of the Joint International Tax Shelter Information Centre arrangements whereby the UK shares, on a reciprocal basis, intelligence with a number of countries including the US, Canada and Australia. This does not require any formal reporting by intermediaries or taxpayers.
We will also remain party to a large number of double tax agreements, including those with most or all EU Member States and these typically provide for mutual assistance and under which the UK already exchanges significant amounts of information with other jurisdictions.
Whatever happens it is unlikely that the UK will allow UK-based intermediaries to enjoy a free for all approach to overseas jurisdictions.
What should law firms be doing to prepare?
Law firms will need to be familiar with the provisions to ensure that they are able to comply with any obligations imposed on them to notify other intermediaries or relevant taxpayers. It is unclear precisely how many taxpayers’ reports made to HMRC under DOTAS were necessary due to legal privilege. It is possible, though perhaps unlikely, that clients of law firms may prefer the lawyer to make any necessary disclosure to avoid the risk of any such disclosure being incorrect.
In any event, where legal privilege is in point, clients of law firms will no doubt need advice on how to comply with any intermediary obligation that they have assumed.
What are the commencement provisions? What are the next steps in the consultation process?
DAC 6 comes into force on 1 July 2020, but the reporting obligation will apply to a CBA where the first step occurred after 25 June 2018, so care will be required.
HMRC is currently consulting on the detail so it is possible that the draft regulations may be subject to change. Consultation responses must be in by 11 October 2019. Guidance is also promised in due course but Brexit uncertainty may encourage some to wait and see. Since the precise date HMRC will publish any promised guidance is uncertain, that could in the long-term cause difficulties.
Partner Ray McCann was interviewed by Susan Ghaiwal for LexisNexis and be found here on their website.