Disclosable anti-tax-avoidance arrangements (HMRC publishes draft regs on “DAC 6”)

DAC 6 is a new EU anti-avoidance regime involving mandatory disclosure and automatic exchange of information across EU countries in relation to certain cross-border tax arrangements.

Despite Brexit, the UK remains committed to implementing the directive. HM Revenue & Customs (“HMRC”) published draft regulations on 22 July 2019, together with a consultation on the draft. The closing date for comments is 11 October 2019.

Summary

Where a cross-border arrangement meets certain hallmarks indicating that the arrangement is used (or could potentially be used) to avoid or evade tax, an obligation arises upon any intermediary involved in relation to that arrangement (or the taxpayer themselves) to make a mandatory disclosure to the relevant domestic tax authority. This information will then be subject to automatic exchange with other tax authorities in different EU jurisdictions.

DAC 6 limits the scope of “tax advantage” to member states, however the HMRC draft regulations extend the scope to non-EU jurisdictions.

HMRC defines a “cross-border arrangement” as one materially relevant to more than one jurisdiction.

It should be noted that an obligation to disclose may arise by reference to the hallmarks even where no tax advantage has been obtained or intended and that DAC 6 could therefore catch  ordinary commercial transactions such as cross-border leasing, securitisation structures, certain types of reinsurance and many standard group corporate funding structures, all which may be reportable.

A principal point to take away is that the disclosure obligation imposed by DAC 6 is significantly broader than what might be expected.  The common sense assumption “I don’t get involved in tax avoidance so DAC 6 can’t possibly apply to me” could lead to the wrong conclusion (and a sizable penalty).

Hallmarks

Five separate categories of hallmarks are provided in the directive, all of which are subject to mandatory disclosure:

• Category A: Commercial characteristics seen in marketed tax avoidance scheme.
• Category B: Tax structured arrangements seen in avoidance planning.
• Category C: Cross-border payments and transfers broadly drafted to capture innovative planning but may pick up many ordinary commercial transactions where there is no main tax benefit.
• Category D: Arrangements which undermine tax reporting/transparency.
• Category E: Transfer pricing: non-arm’s length or highly uncertain pricing or base erosive transfers.

(Summarised in greater detail with examples in the consultation.)

HMRC has sought to further clarify which types of arrangements fall under each category in the draft regulations, however there are still a number of areas where this remains unclear.

Some of the hallmarks are based upon the ‘main benefit’ test, which questions whether a ‘tax advantage’ is the main benefit, or one of the main benefits which a person may reasonably expect to derive from the relevant cross-border arrangement. The intention of the taxpayer and/or intermediaries (and whether a tax advantage is actually obtained) is irrelevant, the test is objective.  Other hallmarks apply regardless of whether the main benefit test is met.

For the purpose of applying the main benefit test, a tax advantage will be ignored if the tax consequences of the relevant arrangement are entirely in line with the policy intent of the legislation on which the arrangement relies.  This means that the use of certain products which are intended to generate a beneficial tax outcome (such as ISAs or pensions) will not inherently mean that the main benefit test is met.

Intermediaries and the taxpayer

• An intermediary under the directive is a person or entity who designs, markets, or implements an arrangement that meets any of the hallmarks above. It further includes those that are involved in advising/assisting with reportable arrangements and know or could be reasonably expected to know that they are doing so. The draft regulations specify that employees of an intermediary are not themselves intermediaries. However, no such provision has been made for partners in a limited liability partnership or consultants.
• On this basis, law firms and/or lawyers (including in-house counsel) may be deemed to be an intermediary in any such arrangements. If an intermediary is unable to report due to legal professional privilege, the intermediary is expected to inform other intermediaries of their reporting obligations.
• HMRC expects that even where legal professional privilege applies, it will not necessarily exempt lawyers from making disclosures. Even where elements of the advice provided by the lawyer are covered by privilege, any pieces of reportable information not subject to privilege will still have to be disclosed.
• If there is no intermediary who is required to disclose, the disclosure obligation falls upon the taxpayer.
• A taxpayer does not have to be resident in the UK, or paying UK tax, to be required to disclose under the draft regulations. Furthermore, the obligation may arise by the mere fact that a relevant arrangement has been made available to the taxpayer, regardless of whether it has been implemented.

Reportable information

Where an obligation to disclose arises under the directive, the details of the arrangement and persons involved that are required to be disclosed are broadly as follows.

 Identification of all taxpayers and intermediaries involved, including:

• Tax residence.
• Name, date and place of birth (if an individual).
• Tax Identification Number (TIN).
• Where appropriate, the associated persons of the relevant taxpayer.
• Details of the relevant applicable hallmark(s).
• A summary of the arrangement, including (in abstract terms) a summary of relevant business activities.
• The date on which the first step in implementation was or will be made.
• Details of the relevant local law.
• The value of the cross-border reportable arrangement.
• Identification of relevant taxpayers or any other person in any Member State likely to be affected by the arrangement.

Broadly, a cross-border arrangement meeting one or more of the hallmarks will be reportable within 30 days of the earliest of (i) the date after the arrangement is made available for implementation, (ii) the day after the arrangement is ready for implementation, and (iii) when the first step in the implementation of the arrangement has been made.

Where the first step of a reportable arrangement is implemented on or after 25 June 2018 and prior to 1 July 2020, any report must be submitted by 31 August 2020 (which is the earliest reporting deadline).

Where a reportable arrangement is a “marketable arrangement” (being a cross-border arrangement that is designed, marketed, ready for implementation or made available for implementation without a need to be substantially customised), there is an ongoing obligation on the relevant intermediary to provide further returns with any new information every three months.

Penalties

DAC 6 confers discretion to member states in determining penalties for non-compliance. HMRC has based the penalty regime in the draft regulations upon the existing penalty regime under DOTAS (disclosure of tax avoidance schemes).

As such, penalties include daily fines of £600, tribunal-imposed fines of up to £1 million, and other fixed penalties with varying conditions surrounding the right to appeal. A defence of ‘reasonable excuse’ is permitted in the event of failure to comply.

Commencement

The draft regulations are currently due to come into force on 1 July 2020 but have retrospective effect from 25 June 2018.

This piece was researched and prepared by Annette Beresford, with significant input from Kieron Glover who joined Humphreys Law for two weeks as a paralegal during summer 2019.

All the thoughts and commentary that HLaw publishes on this website, including those set out above, are subject to the terms and conditions of use of this website.  None of the above constitutes legal advice.  None of the above should be relied upon.  Always seek your own independent professional advice.

Humphreys Law