HMRC has published a consultation paper and draft secondary legislation on the implementation of the EU mandatory disclosure rules as set out in Directive 2018/822, known as DAC6. It requires intermediaries, service providers and relevant tax-payers to notify HMRC of defined cross border transactions with effect from 1 July 2020. Transactions taking place between 25 June 2018 and 1 July 2020 will also be reportable if they are within scope.
The UK Government considers that reporting obligations under DAC6, including information shared with HMRC by tax authorities in other jurisdictions (specifically EU member states) that have implemented similar reporting regimes under DAC6, will provide it with an early warning of perceived aggressive offshore tax planning arrangements by companies and individuals. Final legislation is expected by 31 December 2019.
What transactions are reportable?
There are five broad categories of transaction that are in scope.
- Category A - transactions for which:
- the intermediary imposes a confidentiality requirement on the taxpayer;
- the intermediary’s fee is contingent on the tax benefit obtained by the taxpayer; and/or
- the arrangements have a substantially standardised structure and/or documentation.
- Category B – transactions involving:
- loss buying;
- converting income receipts into capital receipts; and/or
- circular flows of funds involving entities that have no primary commercial function or that cancel each other out or have similar features.
- Category C – specified cross border transactions which result in a tax mismatch outcome where either relief is given twice for the same item of expenditure or relief is given for expenditure but the corresponding income is not taxed.
- Category D - cross border transactions that are considered to undermine or circumvent existing reporting obligations under the Common Reporting Standard (CRS), and/or arrangements involving entities or structures with no substantive economic activity that are considered to obscure the beneficial ownership of assets.
- Category E – transfer pricing arrangements that involve:
- unilateral safe harbours;
- a transfer of ‘hard-to-value’ intangibles; and/or
- the cross border transfer of functions and/or risks that reduces the related projected annual earnings before interest and tax (EBIT) in the subsequent three year period by more than 50 per cent.
Who is required to notify a reportable transaction?
The notification obligation may fall on three different types of party to the transaction.
- Intermediaries who are promoters – this category includes:
- any person that designs, promotes and/or manages the implementation of reportable cross border arrangements; and
- is incorporated/tax resident in the UK or has other specified connections with the UK.
- Intermediaries who are service providers – this term is intended to distinguish between those who design and promote reportable arrangements (ie promoters) and those who may assist in some manner at some point with their implementation.
- Relevant taxpayer – whilst the taxpayer does not have to be resident in the UK or liable to UK tax to fall within scope of the regime if they enter an arrangement that is reportable in the UK, they will typically only be required to notify HMRC of a relevant arrangement where:
- the intermediary does not meet the UK connections requirements mentioned above; or
- the arrangements are developed in-house.
Similar to the DOTAS provisions, it is envisaged that reportable transactions and arrangements will be assigned a unique UK reference number that the taxpayer will need to include on their tax return. There will also be a comprehensive penalty regime, ranging from £600 per day for notification failures up to £1m. As with information shared with HMRC by tax authorities in other jurisdictions implementing DAC6 reporting regimes, any transactions or arrangements reported to HMRC are intended to be shared with other relevant tax authorities, although it should be noted that there may also be a reporting obligation in those other jurisdictions in some cases.
It remains unclear exactly how the mechanics of the DAC6 regime will work, in particular after the scheduled UK withdrawal from the EU. It is hoped that the final legislation, together with HMRC’s guidance that is also expected to be issued by 31 December, will provide greater clarity around how these rules should be applied.
For more information please get in touch with Suze McDonald.