The continuing march towards transparency: the latest UK disclosure obligations

Anyone who designs, markets or advises on arrangements that undermine the automatic exchange of financial account information under the Common Reporting Standard, or attempt to obscure the true beneficial owners of certain offshore entities may be obliged to make a report to HMRC under rules which came into force on 28 March 2023.

Territorial scope

The rules implement the OECD Model Mandatory Disclosure Rules (MDR) and broadly mirror those imposed under DAC6 in relation to similar arrangements (Hallmarks D1 and D2 of DAC6) (DAC6 ceased to apply to the UK at the end of the transition period following Brexit).

There is, however, a significant difference between the UK rules and DAC6. Under DAC6 only cross-border arrangements are reportable - that is arrangements that 'concern' more than one EU member state, or an EU member state and any other country.

The UK rules do not have a similar territorial limit – the rules apply at a global level. This means that UK-based intermediaries will potentially have to report on arrangements regardless of which jurisdictions they involve, and even if there is no connection to the UK (other than the involvement of the UK intermediary). For example, if a UK intermediary is advising in relation to the establishment of a BVI or Cayman Island trust where the settlor, all the beneficiaries and the trust property are outside the UK the UK intermediary would have a reporting obligation if the arrangement was a reportable arrangement (see below). Somewhat unhelpfully and confusingly, some of HMRC's guidance continues to refer to the need to report 'cross-border arrangements'.

What arrangements have to be reported?

CRS Avoidance Arrangements

Arrangements which it is reasonable to conclude are designed to, or marketed as, or have the effect of:

• circumventing or undermining a reporting obligation under the Common Reporting Standard (CRS) and/or any legislation or agreement which implements or provides for the exchange of information under the CRS, or
• taking advantage of the absence of such legislation or agreements.

HMRC's published guidance provides elucidation as follows.

The fact that an arrangement has the effect that no reporting is required under CRS rules does not automatically mean it will be caught; the arrangement must deliberately undermine the rules. For example - funds held in a French bank account by a UK resident are reportable under the CRS but if the UK resident uses those funds to buy a property in France a report no longer needs to be made. The arrangement is not caught, as it is not undermining the CRS; real estate is specifically excluded from reporting under the CRS.

Similarly, advising trustees on the reorganisation of a trust structure to simplify or streamline reporting obligations under the CRS should not be reportable where the CRS reporting after the reorganisation reflects both the economic reality of the position and the persons who exercise effective control at that time. However, advising or assisting a client to move monies to a jurisdiction that has not implemented the CRS or that is not exchanging information with the taxpayer’s jurisdiction of residence for tax purposes, or establishing structures using jurisdictions which it is known do not exchange financial account information with the jurisdiction of tax residence of the taxpayer may be caught.

Opaque Offshore Structures

Arrangements which involve non-transparent legal or beneficial ownership chains through which a passive offshore vehicle (that is, one which does not carry on a substantive economic activity) is held and where the ultimate beneficial owners are rendered unidentifiable.

The identity of the beneficial owners does not have to be publicly available; the test is whether beneficial owners can reasonably be identified by relevant law enforcement agencies or tax authorities, including HMRC.

Examples of where beneficial owners are made unidentifiable include where undisclosed nominee shareholders are used, or where control of an entity is exercised indirectly, rather than by formal ownership or express powers. Beneficial ownership is also likely to be obscured where a structure uses jurisdictions where there is no requirement to keep information on beneficial ownership, or no mechanism to obtain it. In relation to trusts, merely identifying beneficiaries by class (rather than naming them individually) or giving the trustees power to add beneficiaries at a later date will not of itself result in arrangements being reportable.

An obligation to report only arises in relation to arrangements made available on or after 25 June 2018. This is the same cut-off as applied under the UK regulations implementing DAC6.

Who has to make reports?

The UK rules apply to any intermediary (involved in the arrangements) that is resident, incorporated or registered, or has their place of management, in the UK or operates through a branch or office in the UK. Parallel rules apply in other jurisdictions which have transposed the MDR, whether via DAC6 or otherwise.

Where the intermediary does not, or cannot, make the necessary report (eg a law firm may be prevented from reporting where legal privilege applies and is not waived), the reporting obligation falls on the underlying client.

Next steps

HMRC is adapting its existing DAC6 guidance to reflect the new rules, although much of the guidance is likely to be similar. HMRC has also indicated that it will take account of the OECD commentary on the MDR and interpret terms in accordance with the OECD commentary.

If you have any questions on the disclosure obligations and how they affect you, please get in touch.

This article forms part of a series on transparency issues, including articles covering:

• Register of Overseas Entities – missed deadlines and incorrect information
• Beneficial ownership registers and trusts acquiring UK land
• Register of Overseas Entities - changes impacting trust structures and requiring additional information
• Is public access to UK beneficial ownership registers here to stay?
• Enhancements to the UK corporate beneficial ownership register – the Register of Persons with Significant Control