HMRC publishes regulations for implementing DAC6

The government laid the International Tax Enforcement (Disclosable Arrangements) Regulations, SI 2020/25, on 13 January 2020, with a number of changes from last year’s draft version. The regulations implement the amended EU administrative cooperation directive (DAC6) into UK law, introducing new disclosure and reporting rules for intermediaries involved in designing and promoting potentially aggressive cross-border tax planning schemes with effect from 1 July 2020.

The directive came into force on 25 June 2018 and the UK is required to transpose it before ceasing to be a member of the EU and during any implementation period.

The regulations will apply to arrangements that are made available, or are ready, for implementation on or after 1 July. Affected taxpayers and their advisers will also have to make reports in respect of arrangements entered into on or after 25 June 2018. These reports will be due by 31 August 2020.

HMRC consulted between July and October 2019 on a draft of the regulations and published a summary of consultation responses on 13 January (bit.ly/2M9m9vF). The response document outlines a number of amendments made to the final version of the regulations. The document notes that while the UK government is limited by its legal obligations under EU law ‘to implement the directive faithfully’, it has made changes to make the UK legislation more proportionate. The amendments include:

• confirmation that the default position for penalties will be a one-off penalty of up to £5,000, with daily penalties charged only for serious failures;
• decisions on reasonable excuse in relation to penalties will take into account whether a person ‘maintains such procedures as it is reasonable in all the circumstances to have in place’ to secure compliance;
• narrowing the territorial scope of the rules, with new definitions of ‘UK intermediary’ and ‘UK resident taxpayer’ to ensure the regulations only apply to intermediaries with a connection with the UK;
• limiting the scope of ‘tax advantage’ to direct taxes arising in EU member states, i.e. those to which the DAC applies;
• confirmation that reporting will be required only in the first year in which the taxpayer participates in the arrangement and any year where there is a direct tax advantage; and
• modification to ensure breaches of legal professional privilege do not occur.

HMRC intends to publish detailed guidance on the regulations in the International Exchange of Information Manual before the regulations come into force on 1 July. The response document highlights a number of areas raised in the consultation to be covered in the guidance, including:

• examples to illustrate when arrangements will concern multiple jurisdictions, and in particular the meaning of ‘material relevance’;
• situations where intermediaries can rely on another intermediary, whether in the UK or in another jurisdiction, to report without the risk of penalties;
• clarification that individual partners can be intermediaries, although partnerships will be able to make relevant reports on behalf of partners who would otherwise have to report separately;
• confirmation that intermediaries will not be required to do any additional customer due diligence beyond what they would normally do in the course of their business and in compliance with their existing obligations;
• reporting trigger points, particularly the meaning of ‘made available’ and ‘first step’;
• the level of evidence required for an intermediary to be exempt from reporting, such as where a promoter has reported an arrangement and a service provider can, without further verification, rely on that report being complete; and
• the meaning of ‘substantially standardised’ documentation for the purposes of Hallmark A3.

Jason Collins, partner at Pinsent Masons, commented that, ‘While the consultation response provides some comfort in relation to how the regime will be implemented, businesses will need to rely heavily on HMRC guidance’.

HMRC has also published a tax information and impact note (bit.ly/3888pZS) giving the background to the regulations.

On 8 January, HM Treasury published its report to satisfy the requirements of Finance Act 2019 s 84 obliging the chancellor to report to the House of Commons on how the government will exercise its powers to implement DAC6 in the event of the UK leaving the EU both with and without a deal. Although the uncertainty surrounding the withdrawal agreement has largely been overtaken by events, the report sets out the planned approach to both scenarios as follows:

• if the withdrawal agreement has not been ratified, the UK would not be obliged to implement the directive, in which case the government may make consequential, supplementary, incidental, transitional or saving provision and may do so by amending, repealing or revoking the regulations; or
• if the withdrawal agreement has been ratified, the UK will implement the directive through regulations made under the powers in section 84, following which the government may make consequential, supplementary, incidental, transitional or saving provision and may do so by amending, repealing or revoking the regulations in order to ensure that the rules work as intended after the UK leaves the EU.

As the UK government had a significant role in developing DAC6 in the first place, it seems unlikely it would want to abandon the rules at a later date, and the report reiterates the significance of the regulations in allowing HMRC to identify and challenge offshore non-compliance and deter aggressive tax avoidance.