Rules that would have required UK businesses to report crossborder tax planning arrangements have been cut back significantly as a result of the free trade agreement reached with the EU in December 2020. As a result of the deal, UK businesses and their intermediaries will instead be required to report under the less stringent OECD rules.
The move has come as a surprise to many tax advisers. Although a number of EU directives were expected to fall by the wayside as a result of the UK’s departure from the EU, it was widely understood that the government would continue to implement DAC 6, an EU directive on administrative cooperation concerning the reporting of crossborder tax arrangements, many of which are often perceived to facilitate tax avoidance.
However, shortly after the UK government agreed the trade deal, HMRC let it be known that DAC would be no more. Instead, the UK will now implement the OECD’s mandatory disclosure rules (MDR) as soon as possible to move to international, rather than EU, standards on tax transparency.
Net gain in burden?
According to RSM tax partner Jackie Hall, this represents a significant reduction in the UK tax reporting requirements, with the OECD rules effectively only requiring arrangements to be reported if they undermine reporting obligations, or involve non-transparent legal or beneficial ownership, offshore entities or structures with no economic substance.
‘Arrangements involving EU states, which could previously have been dealt with by a report to HMRC, may now need to be reported within an EU jurisdiction instead, leading to additional burden’
What is Hallmark D?
Now that the UK will no longer be implementing DAC 6, the only hallmark for a reportable transaction will be the so-called Hallmark D.
Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of financial account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
- that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises, and
- are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures
- where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.
‘While providing a welcome bonus for some advisers and participants in crossborder arrangements, this relaxation may create additional burdens for others,’ Hall says. ‘In particular, arrangements involving EU states, which could previously have been dealt with by a report to HMRC, may now need to be reported within an EU jurisdiction instead, leading to additional administrative burdens.’
Robert Langston, a tax partner at Saffery Champness, said a lot of work and investment by accountancy firms and tax advisers had already gone into getting ready for DAC 6 reporting, in both identifying cases and implementing software.
‘It is disappointing that the government was not clearer on the roadmap,’ he says. ‘Right up until Christmas, HMRC was still working on the basis that DAC 6 was going ahead; it was arranging workshops with agents to run through the reporting platform. So, this may have been a government decision rather than an HMRC decision.’
Rolling back
DAC 6 creates a system of mandatory reporting of crossborder tax arrangements affecting at least one EU member state where the arrangements fall within one of a number of ‘hallmarks’, such as confidentiality agreements, circular transactions, double tax relief and transfer pricing.
Some hallmarks would only have been reportable if they passed a ‘main benefit’ test where it would be reasonable to conclude that the main benefit or one of the main benefits of an arrangement is obtaining a tax advantage.
Despite the fact that the UK was leaving the EU, it implemented DAC 6 into domestic law, requiring intermediaries with a connection to the UK to disclose arrangements to HMRC in relation to which they acted as ‘promoters’ or ‘service providers’. The first disclosures were due to be made by 30 January 2021.
The one hallmark that now remains is Hallmark D, where an arrangement has the effect of undermining the rules on beneficial ownership, the Common Reporting Standards or any other equivalent agreement on the automatic exchange of financial account information (see box).
Uncertain regime
‘As the draft legislation to implement the OECD rules has not yet been published, it is also not known for certain what the new reporting regime will look like,’ Hall says. ‘It may, therefore, be too early to be celebrating what some may see as a Brexit dividend, but others see as a barrier to tackling abusive tax arrangements.’
According to STEP, the trusts and estate planning professional body, the move to replace DAC 6 will significantly reduce reporting requirements, although the disclosure of tax avoidance schemes will continue to apply in the UK.
However, under the terms of the EU deal, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s rules.
