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’.
Offshore Structures and Onward Gifts
The so-called “onward gift” tax anti-avoidance rules were introduced by the Finance Act 2018 to complement the changes brought in the previous year aimed at restricting the UK tax privileges afforded to non-UK domiciled individuals. The rules were designed to close some perceived loopholes in relation to the taxation of non-UK resident structures (including but not limited to non-UK trusts). With effect from 6 April 2018, it would no longer be possible for an individual to receive a gift without questioning its providence, particularly where family trusts are involved.
The rules were designed to prevent non-UK structures from using non-chargeable beneficiaries as conduits through which to pass payments in order to avoid tax charges. Gone are the days of “washing out” any trust gains that could be matched to offshore income or gains by prefacing a payment to a UK-resident taxable beneficiary with a non-taxable primary payment to a non-UK resident beneficiary.
“It is notoriously challenging to prove a negative (especially to HMRC) and even more tricky where the taxpayer must speak to someone’s intention other than their own.”
Note that the new rules will apply where funds are received from non-UK resident structures before 6 April 2018 to the extent that they are subsequently gifted after that date.
Increased Investment in Personal Tax Compliance in the UK
Changes in public opinion, advances in technology and increased international fiscal co-operation have made global personal tax compliance initiatives pop up in abundance in recent years. In addition, the Russian invasion of Ukraine and the corresponding economic fallout have prompted governments to increase transparency in relation to investments by wealthy foreign individuals in their countries.
The UK’s 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.
It should therefore be well placed to take advantage of new international efforts to increase tax compliance, particularly against the backdrop of the already extensive network of bilateral tax treaties in the UK, and not forgetting that the UK was 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 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.
Case note: Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC)
As HMRC continue to apply the Kittel principle to increasing numbers of industries and businesses, taxpayers need to be vigilant about evidential requirements that HMRC must fulfil in order to discharge their burden of proof. Read JHA’s latest insight into the First-tier Tribunal’s decision in Lynton Exports (Alsager) Ltd v Revenue and Customs Commissioners  UKFTT 00224 (TC).
If you require any further information about the Kittel, Mecsek, and Ablessio principles, or any other allegations by HMRC of fraud or fraudulent abuse, please contact Iain MacWhannell (email@example.com).
Preparing for the Possibility of a Domicile Enquiry
Helen McGhee, a director and chartered tax advisor at Joseph Hague Aaronson, explores who might be vulnerable to an HMRC enquiry on domicile and how best to deal with such enquiries.
The Kittel Principle - Sweet Sixteen
The following is an article written by David Bedenham about HMRC’s wide-ranging application of the ‘Kittel principle’. The current focus appears to very much be on the labour supply industry and the allegation of ‘Mini Umbrella Company Fraud’ (or ‘MUC Fraud’). This article highlights the need for taxpayers to get specialist advice at an early stage when faced with a Kittel decision. If you have any queries about Kittel-related issues or similar denials of input VAT or assessments to VAT, please contact Iain MacWhannell (firstname.lastname@example.org).