Notwithstanding Brexit, the UK initially implemented the EU’s sixth Directive on Administrative Cooperation (“DAC 6”) in full through the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (“Regulations”) which came into force on 1 July 2020. However, on 30 December 2020, the government laid before the House of Commons an amendment to the Regulations which drastically limited the UK’s implementation of DAC 6 and took effect the following day.
The Regulations are now consistent with the narrower OECD Mandatory Disclosure Rules (MDR), reducing the types of transactions that intermediaries such as law firms must report to HMRC. However, firms should bear in mind that some of the disclosures that they now no longer need to make to HMRC may need to be made to regulators in other countries.
Under the full implementation of DAC 6, cross-border arrangements need to be reported to HMRC if, among other things, they contain any one of five specific “hallmarks” or characteristics (referred to as hallmarks A through E). But the UK’s limited DAC 6 regime now only requires reporting of cross-border arrangements if they contain hallmark D, meaning they either (i) undermine reporting obligations under the Common Reporting Standards or (ii) involve non-transparent legal or beneficial ownership chains.
Hallmark D is the only reportable hallmark both when it comes to reporting new arrangements, which firms have been obligated to do as of 1 January 2021, and for DAC 6’s retroactive reporting requirement, pursuant to which firms must disclose to HMRC by 28 February 2021 reportable arrangements initiated between 25 June 2018 and 30 June 2020, and disclose by 31 January 2021 reportable arrangements initiated between 1 July 2020 and 31 December 2020.
So, the only current and past arrangements that must now be reported to HMRC pursuant to the Regulations are those containing hallmark D. (Firms are also subject to the Disclosure of Tax Avoidance Schemes (DOTAS) rules which may also require them to report certain arrangements to HMRC.)
Although firms may no longer need to report certain arrangements to HMRC, that doesn’t necessarily mean they won’t have to report them to another tax authority. Cross-border arrangement between the UK and an EU member state that contain one or more of the now removed hallmarks (A, B, C and E) may now need to be reported to the EU member state’s tax authority under that country’s DAC6 regulations specifically because the arrangement is not being reported in the UK.
Firms in the UK that provide services related to arrangements involving both the UK and EU and bearing any of the five DAC 6 hallmarks should consult a tax law specialist to assess their domestic and foreign reporting obligations under the Regulations and other states’ DAC 6 regimes.
Firms should also note that under the scaled back DAC6 rules they must still withhold otherwise reportable information that is subject to legal professional privilege. The Law Society has issued a particularly helpful Q&A document on DAC 6 and LPP.
The UK’s scaled back DAC 6 regime is meant to be temporary and is expected to be replaced with legislation that implements reporting pursuant to the OECD’s Mandatory Disclosure Rules. But until that time, firms must comply with the newly amended Regulations.
In the near future, we will be updating our course on DAC 6 for law firms to reflect the recent changes to the Regulations.