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DAC6 Update

  • United Kingdom
  • Tax planning and consultancy - DAC6

30-01-2020

Overview

On 13 January 2020, HMRC published a summary of responses to the consultation on the implementation of DAC6 – the EU-wide regime which provides for the disclosure of certain cross-border arrangements to tax authorities.

The response document noted that while it was not possible to implement DAC6 by the 31 December 2019 deadline due to the dissolution of Parliament on 12 December 2019, the obligation to transpose the Directive into UK law will continue while the UK is still an EU Member State and will continue following Brexit under the terms of the Withdrawal Agreement.

The summary of responses was issued alongside a final version of the implementing regulations, due to come into force on 1 July 2020. The regulations have been updated from the draft version published in 2019 and along with the summary of responses from the consultation process these provide some much-needed clarity as to how the new rules will be applied in the UK context. However, while some clarification has been provided, some significant questions still remain as to the practical operation of the new rules, both for intermediaries and for taxpayers themselves.

Key changes and updates

The key changes and updates coming out of the response document and updated regulations can be summarised as follows: 

  • a recasting of the penalty regime including a provision for daily penalties to only apply in cases of serious failings (such as where the failure was deliberate). Where there are no deliberate failings or other exacerbating factors, any penalty should be a one-off penalty of up to £5,000. In addition, in determining the level of any penalties, consideration will be given to any reasonable procedures being in place as well as any lack of clarity occurring as a result of legislation and/or guidance not having been finalised
  • the regulations have been updated to confirm that they apply only to UK intermediaries and UK resident taxpayers
  • the scope of “tax advantage” has been limited to only cover EU taxes to which the Directive applies
  • a clear statement has been included in the consultation response that intermediaries will not be expected to undertake additional customer due diligence (beyond what would normally be done in the course of business) in order to determine whether a reporting obligation exists
  • for ongoing arrangements, provision for reporting to only be required in the first year a taxpayer participates in such an arrangement and any year where there is a direct tax advantage
  • recognition that Brexit-related reorganisations are not de facto excluded from the scope of the DAC6 rules

While the changes and clarifications above are welcome, the implementing regulations provide only part of the picture in terms of outlining how DAC6 will be applied in the UK. As noted in the consultation response, much of the detail as to how DAC6 will operate in practice will be covered in detailed guidance which is being prepared by HMRC in consultation with relevant stakeholders but which has not yet been issued (either in final or in draft form). No date has been provided for when this guidance will be released, other than to say that this will be issued before the reporting commences in July 2020.

HMRC guidance

Clearly, one of the main focuses of the guidance will be in helping to determine what arrangements are reportable and which are not. By way of example, as only tax advantages which are not consistent with the intention of the relevant tax legislation will be relevant for the purposes of DAC6 reporting, guidance and examples will be provided to illustrate where such tax advantage will / will not be considered to be consistent with the underlying policy intent.

Similarly, HMRC have also indicated that guidance will provide examples of where it would be considered that certain arrangements are caught by the respective hallmarks, for example where there has been a “conversion” of income into capital or what is considered “substantially standardised” documentation.

Other particular points of clarification which HMRC have indicated will be covered in the guidance include the following:

  • when a cross-border arrangement should be considered to “concern” multiple jurisdictions
  • when an intermediary may rely on another intermediary to avoid having to prepare a duplicate report
  • how the reporting obligation will operate in relation to certain categories of intermediary, such as partners in a partnership or individuals who are loaned or seconded
  • the operation of legal professional privilege
  • clarity on the point in time a reporting trigger is reached

Compliance

As can be seen from the summary above, quite a number of significant points of clarification remain. In the meantime, while taxpayers and intermediaries may take some comfort from the more relaxed penalty regime contained in the updated regulations, ensuring as far as possible that appropriate procedures to secure compliance are in place is the best way to avoid falling foul of the new regime when the reporting goes live later this year.

How we can help

We can work with you to develop and implement DAC6 compliance policies and procedures. Our team can assist companies in reviewing existing engagements with outside advisors to ensure agreements are updated and in compliance with the DAC6 directive.