HMRC consultation on the OECD mandatory disclosure rules
HMRC has published a consultation on draft regulations to implement the Organisation for Economic Cooperation and Development (OECD) rules on mandatory disclosure of certain avoidance arrangements. Helen McGhee and Nahuel Acevedo-Peña explain the background to the new rules and their implications.
What is the history of the UK’s current disclosable arrangements regulations?
The OECD published the Model Mandatory Disclosure Rules (MDR) for CRS Avoidance Arrangements and Opaque Offshore Structures back in March 2018. The EU engineered its own version of these rules in parallel to the OECD, and these are set out in an amendment to the Directive on Administrative Cooperation, known as DAC 6.
DAC 6 was designed to give EU tax authorities early warning of new cross-border tax schemes by requiring intermediaries (including law firms, accountants and tax advisers) to file reports where arrangements met one of a number of hallmarks (in Categories A to E) that could be used to avoid or evade tax. As the UK was, at that time, an EU Member State, DAC 6 was implemented in the UK in January 2020 in the form of the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, SI 2020/25 (for the purposes of this News Analysis the UK implementing regulations are simply referred to as DAC 6). It will not have gone unnoticed that the UK has now left the EU and the government has made the decision to implement the OECD model rules to replace the somewhat controversial EU version of the rules.
Why is the government proposing to introduce new regulations?
DAC 6 prompted some concern among the professional services industry regarding the onerous level of reporting required and the increased administrative burden placed on advisers. Perhaps as a result of the uproar and certainly to reflect the UK’s more global approach to tax transparency following its EU departure, the government amended the UK regulations (to ensure they remained operative from 1 January 2021) and introduced significant modifications to achieve closer alignment with the OECD MDR.
The hope is that adoption of a global MDR further promotes country by country consistency in the application of disclosure and transparency so that aggressive tax planning can be tackled at a global level.
What is the effect of the new regulations, and what differences are there from the existing rules?
The new regulations seek to achieve the same objectives as DAC 6 in requiring the disclosure and reporting of any aggressive cross-border tax arrangements (designed to facilitate non-compliance through the use of CRS avoidance arrangements and opaque offshore structures) in order to allow tax authorities to react promptly to tackle harmful tax practices.
MDR sets out broadly similar reporting requirements for intermediaries (including promoters who design or market the arrangement, service providers who assist or aid the implementation of the arrangement and sometimes taxpayers) as DAC 6 but with some discernible differences and important exemptions.
Many of the differences between the two regimes are minor nuances in the definitions (including a reference to reportable taxpayer in the MDR as opposed to a relevant taxpayer) but importantly HMRC proposes to take a similar approach to the interpretation of these terms in the context of the MDR as it took for DAC 6.
The key differences are the exemptions: see below.
Are there any exemptions from the requirement to report?
The exemptions represent a welcome relief for many tax professionals.
The consultation document states that the regulations are intended to avoid duplicate reporting where possible. Therefore a person may be exempted from reporting where the information has already been reported to HMRC or to a tax authority in a partner jurisdiction. Of real significance (following vehement discussions with the Law Society surrounding DAC 6), there is an exemption from reporting where disclosing the information would require the person to breach legal professional privilege.
For arrangements entered into during the period between 29 October 2014 and the date the regulations come into effect, the regulations will only require reporting of CRS avoidance arrangements, and not opaque offshore structures. Additionally in this period, the reporting requirement will only apply to promoters and not to service providers or taxpayers.
There is also a very welcome de minimis exemption that applies to exempt from reporting a potential CRS avoidance arrangement where the value of the financial account is less than US$1m.
Do historic arrangements need to be reported?
CRS avoidance arrangements entered into between the publication of the CRS (29 October 2014) and the date the MDR regulations come into force will need to be reported subject to the preceding exemptions.
Are we expecting revised HMRC guidance?
HMRC intends to publish guidance on MDR once the regulations are finalised and before the rules come into effect. We can expect that the guidance will be broadly consistent with the existing guidance at HMRC International Exchange of Information Manual IEIM 600000 except where there will be tweaks to reflect the OECD model or to address any gaps in the existing guidance.
When are the new regulations expected to come into force?
The new regulations are expected to come into force in summer 2022. It should be noted that while SI 2020/25, which implemented DAC 6 in the UK, will be replaced and repealed, those regulations will still have effect in relation to arrangements entered into before the MDR regulations come into force.
Should lawyers be advising their clients to do anything now to prepare?
As with DAC 6, there will potentially need to be an audit to ensure any necessary reporting of historic arrangements. The government has acknowledged that this retrospective reporting requirement is likely to create an onerous obligation on businesses and the exemptions outlined above are designed to ease this burden. Where HMRC has previously been informed of an arrangement there is no requirement to notify again. Going forward, when reporting is required, the client must comply with its disclosure obligations within 30 days of the first step of the arrangement being implemented.
Clients ought to be aware of the differences between MDR and DAC 6 where they had previously prepared for the implementation of DAC 6.
The narrative surrounding legal professional privilege is important to note. Lawyers who are unable to report as a consequence of legal professional privilege are still required to ‘notify their client in writing of the client’s disclosure obligations (regardless of whether the client is another intermediary or a reportable taxpayer) within 30 days of the arrangement being made available or the assistance or advice being given’.
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Published in ThoughtLeaders4 Private Client Magazine, Helen McGhee expert analysis of the current state of non-dom tax regime and it's future.
HMRC Makes Changes to COP9
On 14 June 2023, HMRC published a substantially rewritten Code of Practice 9 (“COP9”). Helen McGhee and Megan Durnford set out the key changes implemented as a result of this publication.
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The Pandora Papers leak of almost 12m documents back in 2021 purportedly exposed the secret accounts and dealings (including potential tax evasion/ avoidance and money laundering) of 35 world leaders (including the late HM Elizabeth II), as well as many politicians and billionaires. The data was obtained by the International Consortium of Investigative Journalists in Washington DC and led to one of the biggest ever global financial investigations.
Increased Investment in Personal Tax Compliance in the UK (Published in Thought Leaders 4 Private Client)
Advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. To compound the issue, the Russian invasion of Ukraine and the corresponding economic fallout prompted domestic governments to increase transparency in relation to investments held by wealthy foreign individuals (with a focus on oligarchs).
In the UK, in the context of the cost-of-living crisis, public opinion certainly seems to be in favour of increased accountability for high-net-worth individuals (eg, on 9 October 2022, 63% of Britons surveyed thought that “the rich are not paying enough and their taxes should be increased”).1
HMRC is one of the most sophisticated tax collection authorities in the world and the department is making significant investments in technology in the field of compliance work; they are well placed to take advantage of new international efforts to increase tax compliance, particularly considering the already extensive network of 130 bilateral tax treaties in the UK (the largest in the world).2 The UK was also a founding member of the OECD’s Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC) forum.
This article discusses the main developments in support of the increased focus on international transparency and personal tax compliance in the UK. There are other international fiscal initiatives, particularly in the field of corporate taxation, but such initiatives are beyond the scope of this article.
It should be noted that a somewhat piecemeal approach, with constant tinkering makes compliance difficult for the taxpayer and is often criticised for lacking the certainty that a stable tax system needs to thrive.
This article was first published with ThoughtLeaders4 Private Client Magazine
Tax-Related Measures in the Autumn Statement 2022
On 17 November 2022, the Rt Hon Jeremy Hunt MP, the Chancellor of the Exchequer, unveiled the contents of the Autumn Budget 2022. This comes after the International Monetary Fund (IMF) published its world economic forecast on 11 October 2022. The IMF expects the British economy to grow 3.6% in 2022 and 0.3% in 2023. Other major developed economies are also expected to stagnate next year, namely Spain (1.2%), the US (1.0%), France (0.7%), Italy (-0.2%) and Germany (-0.3%).
This note focuses on tax measures included as part of that statement.