Out-Law News | 14 Jan 2020 | 5:12 pm | 6 min. read
The UK's final regulations to implement an EU directive designed to enable EU tax authorities to share information about cross-border tax schemes include some helpful changes.
The rules will now only apply where there is an EU tax advantage, and the penalty regime has been changed so as not to unduly penalise genuine mistakes. UK tax authority HMRC intends to issue guidance before the rules come into force on 1 July 2020.
The UK's final regulations for implementing the EU directive known as DAC 6 have been published.
The regulations require UK intermediaries to report to HM Revenue & Customs (HMRC) cross border tax arrangements which contain a prescribed ‘hallmark’. The information received from these reports will be shared with tax authorities in EU member states so that they can identify any potential tax risks in their jurisdictions. EU tax authorities will in turn share the information they receive about arrangements involving the UK with HMRC.
The primary reporting obligation will fall on ‘intermediaries’. This is very widely defined and includes those who design and market cross-border arrangements as well as those who provide aid, assistance or advice in respect of such arrangements. In some circumstances the taxpayer will be obliged to make the report.
A consultation on the draft regulations closed in October 2019. The UK was meant to have its legislation in place by 31 December 2019 but the dissolution of the parliament and a general election meant this was not possible.
The regulations come into force on 1 July 2020. However, the regime catches cross border arrangements entered into since 25 June 2018. Reports for arrangements entered into from 25 June 2018 to 30 June 2020 will be due by 31 August 2020.
As well as the final regulations, a summary of responses to the consultation has been published. The main changes from the draft regulations published in July 2019 are to:
The government has admitted that the territorial scope of the draft regulations was too wide and has introduced new definitions of UK intermediary and UK resident taxpayer to ensure that the regulations do not apply to intermediaries without a connection with the UK. The regulations also make it clear that an intermediary will only have to report in one country.
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 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". HMRC will provide guidance and examples to illustrate where a tax advantage will and will not be consistent with the underlying policy intent.
The draft regulations provided that a tax advantage could be either an EU tax advantage or a non-EU tax advantage. The government has now accepted that the rules should only apply to EU tax advantages.
Responders to the consultation had expressed concerns that the wide definition of intermediary and the tight timescales for reporting could lead to significant amounts of duplicate reporting, which would be burdensome for both businesses and HMRC.
There are two different types of intermediary: those who design and market cross-border arrangements (promoters) and those who provide aid, assistance or advice in respect of such arrangements (service providers). Service providers are only caught if they know or could reasonably be expected to know that they have undertaken to provide aid, assistance or advice in respect of a reportable arrangement.
The consultation document response confirms that intermediaries will not be required to do any additional customer due diligence to work out whether an arrangement is reportable beyond what they would normally do in the course of their business and in compliance with their existing obligations.
Reporting is usually required within 30 days after the day after the arrangement is made available for implementation, but for an intermediary providing assistance it is within 30 days after the advice or assistance is provided.
In the consultation response the government says it agrees that duplicate reporting should be avoided where possible but said that the structure of the rules and the requirements of the directive mean that some multiple reporting is "almost inevitable". The response document helpfully confirms that where an intermediary who is a promoter has reported the arrangement, an intermediary who is a service provider will be able to rely on that report being complete, without having to verify it directly.
An intermediary who reports an arrangement will be obliged to provide an arrangement reference number (ARN) supplied by HMRC to other intermediaries but HMRC says it intends for an ARN to be provided immediately upon receipt of a valid report.
HMRC will provide guidance and examples to help intermediaries apply the rules in practice.
A significant number of those responding to the consultation said that the rules would be difficult to comply with and that it was inevitable some mistakes would be made. It was felt by some responders to the consultation that the penalty regime originally proposed, which relied on daily penalties, could operate onerously and with disproportionate effects where genuine mistakes had been made. The government has amended the rules so that the default position will be a one-off penalty of up to £5,000, with daily penalties only applying in more serious cases, and subject to the determination of the First-tier Tribunal.
Amendments also clarify that where a person has reasonable procedures in place to secure compliance with the rules, this will be taken into account in determining whether they have a reasonable excuse for a failure.
HMRC guidance will provide more detail on how the penalty regime will operate in practice and will provide examples of the situations where different levels of penalty will apply.
The consultation response says that amongst the responses that addressed legal professional privilege, there was a strong view that the original draft regulations would be difficult for lawyers to operate and risked threatening legal privilege, or putting lawyers in an impossible position where they would either have to fail to comply with the regulations or breach privilege.
The government says it has amended the regulations to address some of these concerns and that it will work with representatives from the legal industry to provide guidance on how the rules will operate.
The UK is legally obliged to transpose DAC 6 before the UK leaves the EU and that obligation will continue during the implementation period, under the terms of the Withdrawal Agreement.
The consultation document response confirms that the UK’s commitment to tax transparency will not be weakened as a result of leaving the EU and the government will continue to work with international partners to tackle offshore tax avoidance and evasion. However, the document states that depending on the outcome of Brexit, amendments may be needed to the regulations in due course.
The DAC 6 rules will impose a significant compliance burden on financial services and professional services firms in particular. The amendments to the regulations show that the government has listened to the concerns that have been raised, although it is constrained by the fact that the UK rules have to be in accordance with the EU directive.
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, which has not yet been published.
HMRC will be working with industry bodies and other stakeholders to produce the guidance, which will be published before the regulations come into force in July 2020.
Businesses which may be obliged to report under the new regime will need to continue to put systems and processes in place to enable them to comply with their obligations.