Out-Law Legal Update 5 min. read
30 Jul 2019, 2:06 pm
Although the regulations and the accompanying consultation document contain some welcome clarifications, the rules are widely drafted and go well beyond only catching aggressive tax avoidance. HMRC takes a very narrow view of legal privilege and the rules will impose significant obligation on professional advisers and in some cases, businesses themselves. It is not clear how the rules will operate post-Brexit.
The UK has published draft regulations for the implementation of an EU Directive known as DAC 6 which is designed to enable tax authorities to share information about cross-border tax schemes with other EU member states. HM Revenue & Customs (HMRC) has also published a consultation document, which sets out some of the principles behind the rules and asks for views on design aspects of the rules as well as the detailed drafting of the regulations. Guidance on the rules is promised once the regulations are finalised.
Disclosures under the rules will need to be made by anyone who is an 'intermediary'. This is widely drafted and includes not just those who design and market schemes, but also anyone who provides aid or assistance with regard to a marketable arrangement. It will catch professional advisers, banks, investment companies and trust companies. In some cases businesses themselves may be required to make the disclosure.
The rules apply to a 'cross-border arrangement', which means an arrangement, which 'concerns' more than one member state or a member state and a third country if certain conditions are satisfied. These conditions include that not all the participants in the arrangement are tax resident in the same jurisdiction. HMRC has confirmed that in order for the arrangement to ‘concern’ multiple jurisdictions, those jurisdictions must be "of some material relevance to the arrangement". Having participants who happen to be tax resident in different countries will therefore not, of itself, be sufficient to make an arrangement cross-border.
A cross-border arrangement will be reportable if it bears one of the specified hallmarks. There are five categories of hallmark. Some of the hallmarks are only triggered where the arrangements satisfy a 'main benefit' test. This will be satisfied if it can be established, having regard to all relevant facts and circumstances, that the main benefit or one of the main benefits which a person may reasonably expect to derive from the arrangements is the obtaining of a tax advantage.
The UK draft regulations define tax advantage so that it will only catch arrangements "where the obtaining of the tax advantage cannot reasonably be regarded as consistent with the principles on which the relevant provisions that are relevant to the reportable cross-border arrangement are based and the policy objectives of those provisions".
The definition of tax advantage goes some way to addressing concerns that routine government sanctioned tax planning arrangements such as ISAs and pensions could be caught because they clearly provide a tax advantage and they could trigger one of the hallmarks as they would usually be on standardised documentation.
It is disappointing, however, that the government has not gone further to ensure that the new rules only catch potentially aggressive tax avoidance arrangements, as this is what DAC 6 was meant to be aimed at. Not all the hallmarks are subject to the main benefit test and the current draft rules still potentially catch many arrangements which do not amount to aggressive avoidance.
One of the hallmarks relates to confidentiality. This is worded as being met where a taxpayer or participant in the arrangement "undertakes to comply with a conditional of confidentiality which may require them not to disclose how the arrangement could secure a tax advantage vis-à-vis other intermediaries or the tax authorities".
However, the consultation document suggests that this is wider than a non-disclosure agreement or written correspondence which includes a requirement not to disclose. HMRC suggests it could include discouraging users from retaining promotional material, requiring correspondence from HMRC to be directed to the promoter or a nominated person or discouraging potential users from taking external advice. All of which fall some way short of undertaking to comply with a confidentiality condition.
The reporting obligations under the new rules apply to arrangements from 25 June 2018, albeit that these do not have to be reported until August 2020.
This aspect of the rules is very problematic. Although HMRC says it 'recognises that this reporting requirement poses certain challenges for intermediaries and relevant taxpayers, particularly where the first step was taken prior to the publication of the regulations and guidance', very little reassurance is offered.
There are significant financial penalties for failing to comply with the regime. For example an intermediary failing to report could be subject to a daily penalty of £600 per day per reportable arrangement, running from the day the report should have been made. This is usually within 30 days after the day after the arrangement is made available for implementation, but for an intermediary providing assistance could be within 30 days after the advice or assistance is provided.
Penalties will not be charged where a person has a reasonable excuse for their failure to comply with the regime. HMRC says "Where a failure relates to an arrangement where the first step of the implementation predates the publication of this consultation document and the draft regulations, and the failure was due to a lack of clarity around the obligations or interpretation of the rules, which could not reasonably have been inferred from the DAC itself, it is likely that the person will have a reasonable excuse for the failure."
This is very little use to most, as DAC 6 is very widely drafted and many had been hoping that the UK would interpret it more narrowly, either in the drafting of the regulations or in the guidance - which we have not yet seen.
The government confirms in the consultation document that the UK will remain committed to international tax transparency, notwithstanding its intention to leave the EU. However, no information is given as to how exchanges of information between HMRC and other EU tax authorities under DAC 6 would operate should the UK leave the EU with no deal.
The consultation document makes it clear that where information relating to a reportable arrangement is covered by legal professional privilege, a lawyer is not required to report that information to HMRC.
However, HMRC takes a very limited view in the consultation document of the ambit of legal privilege. The consultation says that legal privilege "does not exempt lawyers from making reports at all, as other information that is not legally privileged may still need to be reported. In providing aid, advice or assistance in relation to an arrangement, it is likely that much of the information that would need to be reported will not be covered by legal professional privilege, because it will be factual in nature".
HMRC says that lawyers could still disclose the names of relevant taxpayers and other intermediaries and a description of the transactions that are to be undertaken as it says these would not normally be subject to legal professional privilege.
The draft rules and the consultation contain some welcome clarifications, but there are still many areas where the rules seem to be very widely drawn and appear to catch arrangements that would not be regarded as aggressive avoidance.
The consultation is open until 11 October 2019 and those affected by the rules should consider responding.