Public Law Solicitors

UK DAC 6 Regime

Legal Framework

The International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (“The Regulations”) implement into UK law the EU Directive 2018/822 on administrative cooperation (“DAC 6”), which amends the EU Directive 2011/16 (“DAC”) on administrative cooperation in the field of taxation.


Key Dates

The Regulations come into force on 1 July 2020.

Reports for arrangements entered into from 25 June 2018 to 30 June 2020 are due by 31 August 2020.


Purpose

The primary purpose is to provide HMRC with more transparency over ways in which cross-border tax arrangements are used, e.g. to avoid or evade taxes through aggressive tax planning schemes.


Reporting to HMRC

The Regulations require “UK intermediaries” and “UK relevant taxpayers” to report to HMRC any “cross-border tax arrangements” bearing certain characteristics (“hallmarks”). In general terms, arrangements are in scope if they meet one or more hallmarks and concern either more than one EU member state or an EU and non-EU member state.

UK Intermediary

A “UK intermediary” is any person who designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement.

To be an intermediary, a person shall meet at least one of the following additional conditions:

1. be a tax resident in the UK


2. have a UK permanent establishment for provision of services


3. be incorporated in/ governed by the laws of the UK


4. be registered with a UK professional association related to legal, taxation or consultancy services

UK Relevant Taxpayer

A “UK relevant taxpayer” means any person to whom a reportable cross-border arrangement is made available for implementation, or who is ready to implement/ has implemented the first step of such an arrangement.

Reporting Obligation

The reporting obligation is therefore placed on UK intermediaries and relevant taxpayers involved in designing, marketing, organising or managing the implementation of a reportable cross-border transaction or a series of such transactions, as well as those who provide assistance or advice.

Reportable Information

The reportable information shall contain the following, as applicable:



• the identification of intermediaries and relevant tax payers (incl. their name, date and place of birth, tax residence, tax identification number and whether there are any persons who are associated enterprises)


• details of the hallmarks which make the cross-border arrangement reportable


• summary of the content of the reportable cross-border arrangement


• the date on which the first step in implementing the reportable cross-border arrangement has been made or will be made


• details of UK provisions which form the basis of the reportable cross-border arrangement


• the value of the reportable cross-border arrangement


• the identification of the EU member state of the relevant taxpayer and any other EU member states which are likely to be concerned by the reportable cross-border arrangement


• the identification of any other person in an EU member state likely to be affected by the reportable cross-border arrangement, indicating to which EU member states such person is linked

• Reportable Cross-Border Arrangements
  
  
  A “reportable cross-border arrangement” is any cross-border arrangement which contains at least one of the hallmarks.
  
  A “cross-border arrangement” means an arrangement concerning either more than one EU member state or an EU member state and a third country where at least one of the following conditions is met:
  
  
  
  1. not all of the participants in the arrangement are resident for tax purposes in the same jurisdiction
  
  
  2. one (or more) of the participants in the arrangement is simultaneously resident for tax purposes in more than one jurisdiction
  
  
  3. one (or more) of the participants in the arrangement carries on a business in another jurisdiction through a permanent establishment situated in that jurisdiction and the arrangement forms part or the whole of the business of that permanent establishment
  
  
  4. one (or more) of the participants in the arrangement carries on an activity in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction
  
  
  5. such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership
  
  

• Hallmarks
  
  A “hallmark” is a feature of a cross-border arrangement that presents an indication of a potential risk of tax avoidance.
  
  Some of the hallmarks may only be taken into account where they meet the “main benefit test”. The test is satisfied where one of the main benefits, which a person may reasonably expect to derive from an arrangement, is a tax advantage.

Hallmark Category	Description	Conditions	Only taken into account where they meet the “main benefit test”?
A	Generic hallmarks: the main benefit test	The relevant taxpayer/ participant is under a confidentiality condition not to disclose how the arrangement could secure a tax advantage.	☑
		The intermediary is paid a fixed fee by reference to: the amount of the tax advantage derived; or whether or not a tax advantage was achieved.	☑
		The arrangement has substantially standardised documentation/ structure and is available to more than one relevant taxpayer without a need to be substantially customised for implementation.	☑
B	Specific hallmarks: the main benefit test	A participant takes contrived steps in acquiring a loss-making company, discounting the main activity of such company and using its losses to reduce its tax liability.	☑
		Converting income into: capital, gifts or other revenue categories which are taxed at a lower level or tax exempt.	☑
		Circular transactions resulting in the round-tripping of funds.	☑
C	Specific hallmarks: cross-border transactions	Deductible cross-border payments between two or more associated enterprises, as listed in Annex IV.	☑
		The same asset depreciation deductions are claimed in more than one jurisdiction.
		Double taxation relief for the same item of income/ capital is claimed in more than one jurisdiction.
		Transfers of assets with a material difference in treatment of the amount payable.
D	Specific hallmarks: automatic exchange of information and beneficial ownership	An arrangement which may have the effect of undermining the reporting obligation.
		Non-transparent legal or beneficial ownership chain.
E	Specific hallmarks: transfer pricing	Use of unilateral safe harbour rules.
		Transfer of hard-to-value intangibles.
		Certain intragroup cross-border transfers of functions/ risks/ assets.

Compliance

Once the UK DAC 6 regime comes into force on 1 July 2020, intermediaries and taxpayers will be required to file information - which is within their knowledge, possession or control - on reportable cross-border arrangements with HMRC within 30 days beginning:

1. on the day after the reportable cross-border arrangement is made available for implementation; or


2. on the day after the reportable cross-border arrangement is ready for implementation; or


3. when the first step in the implementation of the reportable cross-border arrangement has been made, whichever occurs first.

UK intermediaries will also be required to file information within 30 days beginning on the day after they provided (directly or by means of other persons) aid, assistance or advice.

Further, UK relevant taxpayers will need to comply with the annual reporting obligation.

Legal Professional Privilege

The Regulations - as stipulated under regulation 7(1) - do not require a UK intermediary to disclose any privileged information. In this context, “privileged information” is information with respect to which a claim to legal professional privilege could be maintained in legal proceedings.

Further guidance from HMRC is awaited in order to ascertain how the rules will operate where information is subject to legal professional privilege (see “HMRC Guidance” below).

Penalties for Failure to Comply

As stipulated in the DAC 6, penalties for non-compliance must be effective, proportionate and dissuasive.

A person who fails to comply with any of the provisions of these Regulations is liable to a penalty not exceeding £5,000, or – in certain circumstances - if that amount appears to HMRC to be inappropriately low, it may increase up to £600 for each day during the initial period, with a further penalty of up to £600 for each day on which the failure continues.

A failure to comply with the relevant taxpayer’s obligation to make an annual report carries a penalty not exceeding the relevant sum, which is in some cases £5,000 per each reportable cross-border arrangement to which the failure relates. However, any repeated failures to comply during the period of 36 months are likely to lead to a penalty increase up to £10,000 per arrangement.

HMRC may apply penalty reductions in special circumstances.

Determination of Penalty by First-tier Tribunal

Where HMRC commences proceedings for a penalty before the First-tier Tribunal, the Tribunal - after taking into account all relevant considerations - may determine the amount of penalty up to £1 million.

Appeal

An appeal may be brought to the First-tier Tribunal against HMRC’s penalty determination.

A person liable to the penalty may appeal to the Upper Tribunal against the actual amount of the penalty determined in the First-tier Tribunal, but not against any decision made in connection with the determination of the amount. 


HMRC Guidance

Further clarification of the Regulations is expected from HMRC before the Regulations come into force on 1 July 2020.

In the meantime, it may be prudent for the UK intermediaries and relevant taxpayers to start preparing the necessary processes (e.g. training, IT and other system changes).

Deferral

Given the burden the DAC 6 regime will place on both private and public sectors, including law firms, there is a strong case for deferral of the UK DAC 6 regime in light of the COVID-19 circumstances. The Law Society’s representations - suggesting a deferral of the commencement date - are currently being considered by HMRC.

Author Silvie Cosenza is a trainee solicitor in the public law department, working under the supervision of director Alex Peebles.

Contact Silvie on 02031141337 or at silviec@duncanlewis.com

Contact Alex on 02031141218 or at alexp@duncanlewis.com


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