UK guidance on cross-border tax reporting published

Out-Law News | 02 Jul 2020 | 4:02 pm | 3 min. read

The UK's HM Revenue & Customs (HMRC) has published its guidance on how it will apply the EU directive known as DAC 6, designed to enable EU tax authorities to share information about cross-border tax schemes.

The legislation implementing DAC 6 into UK law applies from 1 July, although the reporting obligations have been delayed for six months as a result of the coronavirus pandemic. DAC 6 requires the reporting of cross border arrangements entered into since 25 June 2018 – more than two years ago.

Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-Law, said: "The guidance is substantially the same as draft guidance issued for comments to industry bodies and those who responded to HMRC consultations on DAC 6. However, it includes a useful new section on penalties, which confirms that having reasonable procedures in place will be vital to prevent penalties arising where reporting obligations slip through the net."

Under DAC 6 UK intermediaries are obliged to report to 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.

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.

Service providers who are not directly involved in promoting or structuring an arrangement but have a more peripheral involvement will only have a reporting obligation if they know or could reasonably be expected to know that they were involved in a reportable arrangement.

A cross-border arrangement will be reportable if it bears one of the hallmarks. 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.

However, other hallmarks, including a number aimed at intra group and connected party transactions, are not subject to the main benefit test and could therefore apply even if the arrangements do not result in a tax advantage.

Robins said: "The reporting obligations pose a real challenge for those who may be involved more peripherally in cross border arrangements such as those providing legal or accountancy advice or banks financing an arrangement. Having reasonable procedures in place to identify reportable transactions will be important."

Law firms will not be required to report information that is subject to legal professional privilege, but they will be required to notify another intermediary or the taxpayer that they will be obliged to report. In June, the Law Society issued guidance for lawyers on DAC 6 and legal professional privilege. 

Failing to report a notifiable arrangement could result in a penalty of up to £5,000. In exceptional circumstances, however, a higher penalty can be imposed if the First–tier Tribunal agrees.

HMRC said in its guidance that in deciding the amount of any penalty an HMRC officer should take into account all relevant facts including what steps had been taken to comply with DAC 6.

A penalty will not be imposed if there is a reasonable excuse for the failure. In considering whether a person has a reasonable excuse HMRC has to consider whether the person "maintains such procedures as it is reasonable in all the circumstances to have in place" to identify reportable cross-border arrangements and comply with DAC 6.

HMRC stressed in its guidance that having procedures in place will not automatically mean that no penalty is due. For example, repeated failures over a short period of time could indicate inadequate procedures, especially if steps are not taken to address potential gaps. It also stresses that simply having procedures in place is not sufficient, if reasonable steps are not taken to ensure that staff comply with them.

There is no definitive list of what ‘reasonable procedures’ are. This will depend on the circumstances. According to its guidance, "in considering whether processes are reasonable, HMRC will have regard to all the circumstances, including in particular, the nature of the business, its size and scale of operations and the general profile of its activities, such as whether it has involvement in a lot of cross-border work."

The guidance lists some procedures to consider, such as training for staff, escalation routes for potentially reportable arrangements, and governance around decisions on what is reportable. 

"Businesses which could be considered intermediaries for DAC 6 purposes should be using the delay in reporting to train staff and ensure they have procedures in place to identify potentially reportable arrangements – remembering that the reporting obligation catches arrangements since 25 June 2018," Robins said.

"DAC 6 procedures could build on those already in place for anti-money laundering or in respect of the corporate criminal offences of failure to prevent the facilitation of tax evasion," she said.

Cross border arrangements entered into between 25 June 2018 and 30 June 2020 will need to be reported by 28 February 2021.

Arrangements which are entered into between 1 July 2020, and 31 December 2020 must be reported within the period of 30 days beginning on 1 January 2021. Arrangements which become reportable on or after 1 January 2021 must be reported within 30 days.