Replacement of DAC 6 with the mandatory disclosure rules – how will this affect finance documents?

In-depth analysis

Introduction

The International Tax Enforcement (Disclosable Arrangements) Regulations 2023 (the UK MDR) have been introduced in the UK, with effect from 28 March 2023. The rules aim to tackle offshore tax evasion and to deter people from entering into arrangements with the aim of evading tax: under the UK MDR, anyone who designs, markets or advises on certain structures and arrangements that could be used to evade tax by circumventing reporting obligations, or attempting to obscure the true beneficial owners of certain offshore entities through the use of opaque offshore structures may be required to make a report to HMRC.

Previous regime

Council Directive (EU) 2018/822 (DAC6) rules were implemented prior to the UK's exit from the European Union by the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (SI 2020/25) (the UK Regulations) and came into force on 1 July 2020. They introduced a mandatory disclosure regime for intermediaries and certain taxpayers in relation to cross border arrangements exhibiting one or more specified "hallmarks".
Following Brexit, the UK was afforded greater freedom in the field of taxation and the scope of the UK Regulations was significantly reduced (from 1 January 2021) by EU Exit Regulations. Reporting obligations were significantly narrowed to only apply to arrangements falling within a category D hallmark (relating to automatic exchange of information and beneficial ownership); effectively disapplying the aspects of DAC6 that went beyond the Organisation for Economic Cooperation and Development's (OECD)'s Model Mandatory Disclosure Rules (the MDR).
This was in keeping with the UK's interpretation of the UK-EU Trade and Co-operation Agreement which provides that "a party shall not weaken or reduce the level of protection provided for in its legislation at the end of the transition period below the level provided for by the standards and rules which have been agreed in the OECD at the end of the transition period, in relation to…the exchange of information, whether upon request, spontaneously or automatically, concerning…..potential cross-border tax planning arrangements….".

Move to Mandatory Disclosure Rules

On 31 December 2020, the Chartered Institute of Taxation published an update detailing a letter from HMRC stating that the UK would consult on and implement the MDR to replace its implementation of DAC 6 and to transition from European to international rules on tax transparency.
The UK Regulations have now been revoked – the UK MDR were made on 16 January 2023, implementing the MDR with effect from 28 March 2023. The new rules broadly mirror those imposed under DAC6 in relation to similar arrangements.
The effect of UK MDR is that anyone who designs, markets or advises on arrangements that undermine the automatic exchange of financial account information under the OECD's common reporting standard (CRS); or attempts to obscure the true beneficial owners of certain offshore entities via the use of opaque tax structures, may be obliged to make a report to HMRC.
The UK MDR 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. Where the intermediary does not, or cannot, make the necessary report, the reporting obligation falls on the underlying client.
For further detail on CRS Avoidance Arrangements and Opaque Offshore Structures, please see our recent article: The continuing march towards transparency: the latest UK disclosure obligations.
There is one significant difference between the UK MDR and DAC6 in terms of territorial reach: under DAC6 only cross border arrangements that concern more than one EU member state, or an EU member state and another country are reportable. The UK MDR apply globally therefore UK based intermediaries may be required to report on arrangements regardless of the jurisdictions they involve.

Impact on Finance Transactions

The arrangements reportable under UK MDR are broadly similar to those which were reportable under UK DAC6 and so, in general terms, the same processes can be followed by intermediaries when considering their obligations under UK MDR.
Under the previous regime, references to the UK Regulations could be included in facility agreements in cross border transactions, where it was considered that the regime could potentially apply and there may be a potential reporting obligation.
Relevant wording included a representation to the effect that no transaction contemplated by the facility documents fell within the UK Regulations, and an information undertaking pursuant to which the parent company agreed to provide the Agent under the facility with any advice or analysis obtained or reporting made in relation to the UK Regulations.
Given the similarity between the two regimes, other than in territorial scope, it is suggested that a similar approach may be taken in relation to references to UK MDR and the wording within such representation and undertaking can be adapted to the new rules and applied in a similar way to that under the previous regime.

Final thoughts

HMRC provided guidance on the interpretation and application of the D1 and D2 hallmarks within UK DAC6, which it is in the process of adapting to reflect the new rules. 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.