In Inverclyde Property Renovation LLP and another v HMRC [2019] UKFTT 0408 (TCC), the First-tier Tribunal upheld an appeal against closure notices that were issued to two LLPs. The FTT found that HMRC should have enquired into the appellant LLPs’ partnership returns under paragraph 24 of Schedule 18 to FA 1998 regarding corporation tax self-assessment and not s12AC of TMA 1970 for partnerships.
The LLPs stated that they did not rely on any lacuna in the legislation, but it was a straightforward case of HMRC having followed the wrong procedural steps. Moreover, HMRC could still be able to remedy the situation through their powers to make discovery assessments, subject to statutory limits.
If HMRC wanted to challenge the relevant return of any LLP members, they should have opened an enquiry into those members’ own returns under s9A, TMA. The FTT reiterated that a taxpayer will not be prevented from challenging the procedural course adopted by HMRC only because they have accepted incorrectly issued notices of enquiry and the fact that HMRC has used a procedural course for a considerable period does not make it correct.
It is HMRC’s common practice not to open s9A TMA 1970 enquires into the returns of individual partners of LLPs in analogous scenarios. This decision may therefore have a wider impact on other similar enquires.
HMRC has appealed the FTT decision and the UT hearing is on 27 April 2020.
Many of our clients have made various historical claims for repayment of tax on dividend income. On Friday 24 January 2020 HMRC sent JHA a “business brief” outlining their approach to resolving these claims. In summary, HMRC say they will now accept as valid claims, in-time exemption filings with open enquiries, taxable filings with DTR claimed at the ULT rate and DTR claims outside the return within the s806(1) ICTA time limits. The above also follows for pay and file years where there is an assessment and an appeal.
Other claims are less certain. The brief suggests returns amended on an exemption basis will be dealt with on a case-by-case basis and is entirely silent on error or mistake claims. HMRC have indicated they will contest any claim failed outside the strict statutory time limits. Nevertheless, the brief is an encouraging development.
It was hard to miss the news last month of a new deal agreed between the UK and EU. This article explores the legal ramifications of adopting this deal as law. Before delving into the conundrum itself, it is probably best to give a background on the terminology frequently used when discussing Brexit. Specifically, there are three legal documents whose legal status will have an enormous impact on post-Brexit UK Law. The first is the European Union (Withdrawal) Act 2018 (EUWA). This Act of Parliament received royal assent in June 2018 and is currently the governing law on the UK's position post-Brexit. Second, is the new Withdrawal Agreement (New WA). This is the agreement reached on 17th October 2019 by Prime Minister Johnson and the EU. Finally, there is the European Union (Withdrawal Agreement) Bill, more commonly referred to as The Withdrawal Agreement Bill (WAB). This Bill was first presented to Parliament on 19th October 2019 (Super Saturday). The New WA itself does not become binding until it is ratified. Pursuant to the EUWA, the UK cant do this without the House of Commons passing a motion known as a meaningful vote. The EU process of ratification is discussed in our article The Withdrawal Agreement Is It Legal?. Importantly, the New WA is not legally binding under domestic law and must, therefore, be given effect through an Act of Parliament, hence the introduction of the WAB into the House of Commons. On Super Saturday, MPs opted to withhold approval of the New WA through a meaningful vote until the means for transposing it into domestic law had been agreed. What this means practically is the New WA cannot become binding unless the WAB is first passed. If passed, the WAB will also amend the EUWA. The passing of the WAB would amend existing provisions in the EUWA and introduce a buffer period known interchangeably as the transition period or implementation period. This is the period between exit day and 31st December 2020. The latter date is frequently referred to as IP completion day. It is envisioned that during this period, a more permanent agreement with the EU will be reached and passed. This transition period may be extended once for up to 1 or 2 years but only if it is agreed by 1st July 2020. Unlike the current situation, once the UK has left the EU, the ability to bilaterally agree on an extension beyond and/or after this deadline will not be an option.
The Transition Period
Under the EUWA, EU law after exit day only has effect in so far as it has been transposed into UK Law. In contrast, the WAB introduces two provisions which effectively delay this. Under these two sections, both EU Law which applies directly or has direct effect, as well as EU, derived law continue to apply as if the UK was still a member of the EU. Similarly, rules regarding the relationship with the CJEU are postponed to the end of the transition period. It, therefore, appears that the elements of EU law excluded by EUWA will continue to have effect in the UK until at least 31st December 2020. The introduction of a transition period has broadened more than just the types of laws which will apply in the short-term. It has also expanded the potential scope of the laws to be retained. This is because any new law (for example a European Commission Decision) made after exit day will still apply to the UK, as long as it is made or passed before the IP completion day.
The Law After the Transition Period
Save for changing the date to which the rules applies to, the original provisions in the EUWA remain largely unchanged. This said a new section has been introduced which appears to reduce the scope of the exceptions to the retained law by recognising rights and remedies created or arising under the New WA. The explanatory notes published with the WAB provides an insight into what specific rights and remedies are likely to be covered by this, namely:
The ability to rely directly on the New WA to bring claims before UK courts;
The supremacy of the New WA over any inconsistent domestic laws;
The use of the EU method of interpretation and principles when examining references contained in New WA to EU law and its concepts.
The introduction of another new provision confirms that the when determining the validity, meaning or effect of the New WA, and by default, the rights and remedies created therein, EU rules of interpretation and EU general principles apply. This niche group of laws, therefore, grant those relying on or interpreting it much broader scope than the general retained laws. In contrast, all other retained laws will be subject to the much stricter UK rules of interpretation. In practical terms what this means for litigation is, if a party wishes to challenge the application of domestic law and can establish a relevant right which has been breached, the scope for arguing that the domestic law has been misapplied will be significantly wider. It also offers the opportunity to have the relevant law declared inconsistent, thereby preventing its application to the matter at hand.
Conclusion
As is evident from the variety of possible avenues the UK may still follow, much is still yet to be decided and agreed. With the pending election in December, it is also largely impossible to predict which route we shall be driven towards. The New WA does not, therefore, bring the clarity and conclusion some may hope it would achieve.
A recent opinion by Advocate General Kokott in the AURES Holdings case (C-405/18) serves as a warning to those considering the relocation of their companies pursuant to the freedom of establishment granted under Articles 49 and 54 TFEU. As background to this case, AURES Holdings (Aures) suffered a tax loss whilst it was established in the Netherlands in 2007. On 1 January 2008, it set up an organisational entity in the Czech Republic. Following the move, it remained a taxable entity in the Netherlands but did not carry on any economic activity. As such, it could no longer take the loss into account when calculating its tax liability in the Netherlands. Aures, therefore, looked to offset these losses against its tax liability in the Czech Republic. However, the tax authority for the Czech Republic refused this relief on the basis that the loss had not been suffered in the Czech Republic. Following proceedings brought by Aures to challenge this decision, the ECJ has been asked to determine (a) whether such circumstances fall within the remit of freedom of establishment and (b) if so, is it contrary to freedom of establishment to deny claims for a tax loss incurred in another member state before the relocation of the claiming company? The Advocate General made three key findings. First, she confirmed that Aures relocation should fall within the scope of freedom of establishment. Second, and most importantly, she considered that whilst there was a restriction imposed by the Czech Republic, this restriction was justified on the basis of the balanced allocation of taxing powers. Third, she found that the restriction was proportionate as no less severe restriction was evident. It is also interesting to note that AG Kokott referenced the contentious nature of the Marks & Spencer decision, which led her to conclude that the principle contained therein (that a subsidiary or a permanent establishment's final losses could be used by the parent) should not be extended.
Brexit is a well-discussed but a scarcely-understood topic that has dominated headlines and news articles for the last few years. With the passing of the latest Deadline Day, in this article, we look at the various options now faced by the UK if it fails to ratify the new deal and the legal ramifications of each choice. The legal implications of passing the deal are discussed in our article Brexit What happens if Parliament passes the new deal?. There are 3 possible routes the UK could go down if the WAB has not received royal assent by exit day which, following an agreement with the EU on the 28th October to another extension, is now set to be 31st January 2020. First, as it has not yet left the EU, the UK could revoke its Article 50 Notice thereby withdrawing its intention to leave the EU. Were this to happen, there would be no change to the UK-EU legal relationship and the law would, therefore, stay the same. The second option would be to extend the deadline for Brexit beyond the currently agreed date of 31st January 2020. As with previous extensions, this could not be done unilaterally by the UK and would instead need the consent of the EU. Furthermore, it would only serve to delay the date on which the UK leaves the EU and the legal ramifications attached to this. Finally, the UK could leave the EU on 31st January 2020 without a deal. Following the passing of the EUWA, this does not mean that all EU Law no longer bears any relevance to the UK. Instead, for the most part, the EUWA transforms all EU law made before exit day into UK Law. These laws are known as the retained laws. This applies both to EU Law that was directly effective and applicable to the UK, as well as any law passed in the UK for the purpose of transposing EU law into domestic law (defined as EU derived law). This general rule is far-reaching as it includes all rights contained in the EU treaties up to exit day and pre-exit case law of the Court of Justice of the European Union (CJEU).
Exceptions to the General Rule
There are, however, some exceptions contained in EUWA to this general rule. The first exception is the primacy of EU law. Currently, if two primary laws are inconsistent, the law which was passed later will override the earlier law. A caveat to this is when one of those laws is an EU Law. Where this is the case, the EU law will take precedence over the domestic law, regardless of when the latter was passed. After the exit day, this will no longer be the case. Future parliaments will, therefore, be able to legislate against or away from what was EU Law. The second exception to the general rule of incorporation is the general principles of EU Law. Under this exception, no claim can be brought to the UK courts on the basis of the general principles of EU law after exit day. Similarly, no UK court will be able to disapply or quash any enactment or rule of law nor quash any conduct on the grounds that it is incompatible with such principles. There is an important caveat, however, to this exception. If the general principle has been recognised in a case decided by the CJEU prior to exit day, the general rule applies and this specific principle forms part of the retained law. Principles such as proportionality, equivalence and effectiveness should, therefore, be incorporated into domestic law. Finally, after the exit day, Francovich damages are excepted from the general rule of incorporation. Francovich damages are the compensation the UK could currently be liable to pay to individuals for a failure to transpose an EU directive either correctly or in time. After exit day, however, any future litigation about the failure or validity of transposition of EU directives created prior to exit day will not have that remedy available. A further exception, namely the Charter of Fundamental Rights, relates to the rights of EU citizens and therefore falls out the scope of this article.
Claw-Back Provisions The Exception to the Exceptions
The exceptions just set out, also come with three key caveats. Scenarios that fall within these caveats, fall outside the scope of the exceptions, meaning the general rule will apply. The first caveat confirms that the exclusion of the general principles and Francovich damages will not apply to proceedings which have begun before a UK court or tribunal but are not finally decided before exit day. As such, based on the currently set exit day, any claims based on the general principles and/or Francovich claims brought before 31st January 2020 can continue. The second caveat relates to the exclusion of rights of action based on the general principles of EU law. Pursuant to this caveat, any proceedings brought within 3 years of exit day can be based on the general principles provided that:
They do involve a challenge to anything which occurred before exit day (for example, the payment of unlawfully levied tax on 30th October 2019); and
The challenge is not for the disapplication or quashing of (a) an Act of Parliament, (b) rule of law, (c) anything else which enforce (a) or (b), or (d) anything else which could not have been different because of anything passed which falls under (a) or (b).
In practice, this caveat acts as an overruling limitation period for bringing actions based on general principles, whilst also maintaining the exclusion of the disapplication/quashing option currently available to UK courts. As exit day is currently set to be 31st January 2020, this would mean that such claims could still be brought up to and including 30th January 2023. Notably, the stipulation regarding the disapplication or quashing of Acts of Parliament and so on is not specified in the first caveat. Presumably, therefore, it will still be open to a court or tribunal to disapply or quash the relevant Act or rule of law if the relevant proceedings were brought before exit day. The third caveat relates to the exclusion of Francovich damages. This allows claims for Francovich damages to be sought provided that:
The claim is brought within two years of exit day; and
The proceedings relate to anything which occurred before exit day.
CJEU Case-Law
The EUWA also makes specific provisions regarding the relationship between the CJEU and UK courts. First, it distinguishes between laws made before exit day (retained law) and those made on or after it. In the case of the former, the Supreme Court is not bound by it. Similarly, the supreme criminal court in Scotland, the High Court of Justiciary, is not bound by retained law when determining certain matters under the Criminal Procedure (Scotland) Act 1995 and Scotland Act 1998. This does not mean these two courts will depart from EU law lightly as the test for departure will be the same for that used by the court for overturning its own previous decisions. All other UK courts and tribunals will only be bound by the retained law by reason of its domestic nature as primary legislation. These are the precedence rules. Subject to the precedence rules, after exit day UK courts will still be able to determine the validity, meaning or effect of any retained law. When doing so, any decision should be made in accordance with any pre-exit case-law and any retained general principles of EU law (as detailed above). Another factor which remains relevant to this decision is the competences of the EU. Here too there is a caveat, namely that if the relevant retained law has subsequently been modified, the decision can only be made (with regard to the relevant factors) in so far as to do so is consistent with the intention behind the modification of the law. The EUWA also confirms that UK courts and tribunals will not be bound by any principles or decisions made by the CJEU after exit day, nor may they refer any matter to the CJEU after exit day. However, the EUWA also stipulates that UK courts and tribunals may have regard to anything done by the CJEU, another EU entity or the EU in so far as it relates to the matter being decided by the UK court or tribunal. Presuming no further amendments are made to this provision, the discretion awarded to judges to have regard to EU law will likely be crucial in challenging any reliance on EU law which was valid up to exit day but which has since been overruled. This will be especially relevant to any parties who have had matters decided by the General Court or European Commission which are or may still be appealed to the European Court of Justice after the exit day.
Four of JHA's partners have been selected as highly regarded individuals in the latest edition of Tax Controversy Leaders. This guide by Euromoney's International Tax Review, in association with World Tax, selects the leading Tax Controversy lawyers worldwide based on independent research, including client and peer interviews. Graham Aaronson QC, Michael Anderson, Paul Farmer and Simon Whitehead from JHA's tax disputes team have all been included in the guide. In recent weeks, JHA's contentious tax team has once again achieved top tier rankings in both The Legal 500 UK and Chambers and Partners UK 2020 guides. JHA remains the only law firm to have achieved such rankings in both guides every year since its inception. These continued successes by the firms' tax team demonstrate its market-leading position, which is the result of JHA's unique model of employing expert solicitors, barristers and forensic accountants to offer clients unparalleled service, combined with its experts close working relationships with clients. You can find the Tax Controversy Leaders list for the UK here.
JHA's contentious tax team has contributed to the recently published fourth edition of The Legal 500: Tax Country Comparative Guide. This go-to guide provides readers with a pragmatic overview of the Tax laws and regulations across a variety of jurisdictions worldwide. Each chapter covers a different jurisdiction and contains information on withholding tax, transfer pricing, the OECD model, GAAR, tax disputes and an overview of the jurisdictional regulatory authorities. The template for each chapter was provided by JHA's Michael Anderson and Simon Whitehead, who also wrote the UK chapter for the guide. In the past two weeks, JHA's contentious tax team has once again achieved top tier rankings in both The Legal 500 UK and Chambers and Partners UK 2020 guides. JHA remains the only law firm to have achieved such rankings in both guides every year since its inception. Being chosen as a key contributor to this guide, combined with our directory rankings, demonstrates the marketing leading position of JHA's tax team. This has been achieved through the firm's unique combination of expert solicitors, barristers and forensic accountants, as well as its close working relationships with its clients. This approach enables our continued success in dealing with complex, high value and often ground-breaking tax disputes. Read JHA's chapter in the guide here and view the whole guide here.
JHAs senior associate Helen McGhee has contributed five chapters to the latest edition of Revenue Law: Principles and Practice. This book is considered a go-to guide and key reference source for business and finance students, professionals and others operating in these sectors. The book is published annually at the end of September by Bloomsbury Professionals as part of their Tax Annuals and provides readers with an up-to-date understanding of the law relating to all areas of UK taxation with extensive cross-references to HMRC guidance, tax legislation and relevant case summaries. Helen has completed her annual contribution which covers updates for two chapters to the section on Income Tax General principles and taxation of individuals, and The overseas dimension. She also writes the chapter on companies and shareholders for the guides section on Capital Gains Tax, as well as two chapters for the business tax section. These cover Choice of business medium and Incorporations, acquisitions and demergers. Helen joined JHA in 2016. She is a qualified solicitor, a Charted Tax Adviser, a member of the Society of Trusts and Estates Practitioners, and a CEDR Accredited Mediator. She acts on behalf of corporates as well as individuals; she specialises in the taxation of UK residents and non-UK domiciled high net worth individuals. She also advises on Employee Benefit Trusts, Film Schemes and the disclosure of non-compliant offshore structures. You read a free preview chapter or buy a copy of the book here.
JHAs contentious tax team has once again achieved a band one ranking in the Chambers & Partners UK guide to the legal profession, and with more highly ranked individuals than any other law firm. JHA remains the only law firm to be ranked in the top tiers of both the Chambers & Partners and the Legal 500 guides for each year since it was founded in 2013.
Graham Aaronson QC is described as a fantastic advocate with very deep technical knowledge. Michael Anderson is considered super impressive with good, strategic tax knowledge. Paul Farmer is regarded as very clever, very personable and very impressive. While clients say of Simon Whitehead that his in-depth knowledge of the subject matter is second to none.
The top-ranking of JHAs contentious tax team is testament to its unique integrated model, which brings together expert solicitors, barristers and forensic accountants, as well as to its close working relationship with clients, and which together account for its continuing success in dealing with complex, high value and often ground-breaking tax disputes.
View the Chambers UK contentious tax rankings here and the firm ranking here.
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 the 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 the 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 CBAso 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;
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 an 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 HMRCs 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 [2012] 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 a 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.
