Despite much anticipation to the contrary, the UK Government decided to repeal all but one of the reporting triggers under the UK regulations implementing EU Council Directive 2018/822 on the reporting of cross-border tax arrangements (DAC6), which will no doubt be a welcome development for taxpayers and their advisers.
The decision emerged as a last-minute surprise on 31 December 2020, when the UK Government published, and brought into force on the same day, the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No. 2) (EU Exit) Regulations 2020 (2020 DAC6 Regulations). Although the UK Government’s public statements had previously left some wriggle room to amend or repeal the original implementing regulations, it had implied that such an outcome would only be likely in the event of a “no deal” Brexit. Thus this near full-scale repeal has come as a surprise to many, as the United Kingdom and the European Union had agreed a Brexit deal—the Trade and Co-operation Agreement (TCA)—a few days earlier.
The 2020 DAC6 Regulations repeal all the hallmarks listed in Annex I of DAC6, except for hallmark Category D. Hallmark category D applies (broadly) to the following arrangements:
Cross-border arrangements which have the effect of circumventing the requirements of the Common Reporting Standard
Cross-border arrangements involving non-transparent structures with little or no economic substance that have the effect of making the beneficial owners unidentifiable.
The reason for this apparent volte-face is not entirely clear, but likely stems from the United Kingdom’s commitment in the TCA to follow international, rather than EU, standards. Because the hallmark Category D arrangements effectively implement the OECD’s Model Mandatory Disclosure Rules (MDRs), a full implementation of DAC6 would have gone well beyond what is recommended by the OECD and required under the TCA. For this reason, HMRC may have viewed DAC6 as being more trouble than it is worth, particularly as the United Kingdom has had its own Disclosure of Tax Avoidance Schemes rules in place since 2004.
These changes mean that, as of 11 pm on 31 December 2020, UK-based intermediaries will only have a reporting obligation under DAC6 if the cross-border arrangement in question contains either one of the features listed above. However, if other EU-based intermediaries have been advising on or implementing the same cross-border arrangement, they should consider whether any of the other hallmarks (A, B, C and E) apply in accordance with the domestic implementing rules of the relevant Member State, and if necessary report the arrangement to the tax authority of their home Member State.
The 2020 DAC6 Regulations do not change the fact that any cross-border arrangement concerning at least one EU Member State will continue to be in DAC6’s scope, so UK and rest of world clients still should be mindful of DAC6, even if they have no EU operations. While they won’t have to do the reporting themselves, the arrangement may need to be reported in the European Union, either by an EU-based intermediary, or if none, by the EU-based person to whom the arrangement was made available for implementation. In addition, intermediaries intending to report an arrangement in the United Kingdom under hallmark Category D should consider whether doing so will discharge any reporting obligations in the remaining 27 Member States, now that the United Kingdom itself is no longer treated as a Member State. This will be determined by the relevant local implementing legislation.
The UK Government intends to repeal the 2020 DAC6 Regulations, along with the original implementing regulations, with a view to implementing the MDRs as soon as practicable, and will consult on draft legislation in due course. Until then, the actual reporting mechanisms prescribed under DAC6 will continue to apply in the United Kingdom where the arrangement contains one of the features listed under the Category D hallmark.