DAC 6 – how does it simplify your reporting requirements for new and historic arrangements?

Quick read

Advisers and clients have been gearing up to start reporting new and historic transactions under the EU mandatory tax disclosure regime DAC 6 (Directive 2018/822). However, the red tape compliance burden for UK advisers and clients has lessened considerably following Brexit, which we explore here.

What are the UK changes to DAC 6 reporting requirements?

The scope of DAC 6 has been amended by the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No. 2) (EU Exit) Regulations 2020 (2020 No. 1649). The new regulations significantly reduce the scope of intermediaries' DAC 6 reporting obligations in the UK to the category D hallmarks only. These are hallmarks which relate to cross-border arrangements that could undermine reporting obligations or obscure beneficial ownership.

This simplification is welcome. It will significantly reduce the scope of the additional work required by UK advisers to comply with DAC 6, because they no longer need to consider hallmark categories A, B, C and E or the main benefit test (which only ever applied to the A, B and some C hallmarks).

It also reduces uncertainty for both advisers and corporate and private clients, as the category D hallmarks largely relate to existing information-sharing and compliance regimes which will already be familiar to many.

Reporting obligations for historic transactions

We understand that HMRC has confirmed to the ICAEW that it accepts that all historic arrangements – arrangements which completed between 25 June 2018 and 31 December 2020 – should also benefit from the amended regulations.

The technical basis for this position isn't clear. The regulations apply from 11pm on 31 December 2020, and ostensibly, they don't appear to have retrospective effect. We have seen correspondence from HMRC which says only that "DAC 6 will cease to apply to the UK at the end of the transition period (11pm GMT on 31 December 2020). At that point, the UK will no longer be obliged to implement DAC 6" (emphasis added).

In theory, it's been possible to determine whether a cross-border arrangement could be reportable under the terms of DAC 6 since it was implemented in June 2018. For part of this period, the UK was a full Member State of the EU and during the transition period it was a treated as an EU member state. HMRC could have argued that, where an intermediary provided final advice about a cross-border arrangement before the amended regulations came into force, that intermediary must consider whether it's a reportable arrangement under the pre-31 December 2020 rules.

However, no arrangements have been reported yet. The implementation deadlines have been delayed by six months and HMRC's reporting portal did not open until 1 January 2021. In the regulations that amended the implementation, and in HMRC's own guidance, it's also clear that any historic arrangements should only be reported to HMRC on and from 1 January 2021.

You could argue that intermediaries shouldn't be expected to treat arrangements as "reportable" when there was no way to make a report and they had either not been required to do so, or been told not to do so, by the tax authority. If so, all arrangements would only become reportable after the amended regulations came into force and could benefit from the simpler DAC 6 landscape.

We're currently seeking clarification from HMRC on the technical basis for the treatment of historic transactions.

Other reporting obligations remain

The UK reporting requirements on new transactions and arrangements will be considerably reduced as a result of the above changes. However, there continue to be other disclosure obligations under UK law (for example, the DOTAS regime).

Additionally, any transactions or arrangements that would have been notifiable in the UK under DAC 6 and that involve an entity or counterparty in an EU jurisdiction will typically require notification in some form either by local advisers or – depending on the role of the advisers and local privilege rules – clients.