The UK has effectively repealed DAC6 for the majority of cases. With effect from 11 pm (UK time) on 31 December 2021 – the day before DAC6 reporting was due to begin in earnest - the UK implementing regulations have been amended to disapply DAC6 in respect of all arrangements except those falling within Hallmarks D1 or D2 meaning, broadly, arrangements that involve attempts to conceal income or assets, or to obscure beneficial ownership.
This change removes an ongoing compliance burden for businesses. From a UK perspective, DAC6 consisted of a set of poorly-targeted rules, many of which were either duplicating the UK’s Disclosure of Tax Avoidance Schemes (DOTAS) provisions or required disclosure of innocuous transactions, such as IP on-shoring, which increased the UK tax base. The timing of the amendment is, however, rather awkward – it was not published until 30 December 2020 – and many businesses and advisers will feel aggrieved at the short notice, as costs incurred in training staff and reviewing past transactions may well have been wasted.
What about the look-back period?
The amendment of the UK implementing regulations took effect on 31 December 2020, i.e. the day before 1 January 2021 when the first reporting time limits started to run. Our view is that this timing means that only cross-border arrangements which fall within Hallmarks D1 or D2 must be reported to HMRC. This is the case in respect of all arrangements, irrespective of whether the reporting trigger falls before, on or after 1 January 2021.
DAC6 reporting started in earnest in the UK on 1 January 2021. The applicable reporting time limit depends on the period during which the reporting trigger fell:
- If the first step in the implementation of a reportable arrangement was taken between 25 June 2018 and 1 July 2020, the arrangement must be reported between 1 January and 28 February 2021.
- If the reporting trigger (e.g. the giving of advice, the arrangement’s being ready for implementation or the first step in its implementation) fell between 1 July 2020 and 31 December 2020, the arrangement must be reported between 1 January and 30 January 2021.
- If the reporting trigger falls on or after 1 January 2021, the arrangement must be reported within 30 days.
Where the reporting trigger falls on or after 1 January 2021, it is clear that only arrangements within Hallmarks D1 or D2 have to be reported in the UK. But this should also be correct in respect of arrangements where the reporting trigger fell before 1 January 2021. Taking, as an example, an intra-group transfer of IP from another country to the UK which was implemented in 2019 and fell within Hallmark E2: until 11 pm (UK time) on 31 December 2020, the transaction would have been reportable for the purposes of the UK implementing regulations which would consequently have required it to be reported between 1 January and 28 February 2021. But, by the time that the reporting obligation became effective (i.e. on 1 January 2021), the transaction was no longer treated as reportable in the UK (because the regulations had changed). So, there would never be a reportable arrangement at the same time at which there is a reporting obligation, meaning that, for the past, the present and (as far as we are aware) the future, only cross-border arrangements that fall within Hallmarks D1 or D2 have to be reported to HMRC.
What’s the reason for the amendment?
The explanatory note published alongside the amendment states that it aligns the UK implementing regulations with “the requirements of the Free Trade Agreement” (FTA) concluded between the UK and the EU. Article 5.2 of the FTA prohibits the UK or the EU from weakening their rules on the exchange of information on cross-border tax planning arrangements. Neither party is allowed to dilute those rules below the minimum standard agreed at the OECD level.
DAC6 is the EU’s implementation of the OECD’s Model Mandatory Disclosure Rules (MDRs) for CRS Avoidance Arrangements and Opaque Offshore Structures. This is reflected in Hallmarks D1 and D2. But DAC6 also implements the recommendations made in the OECD’s Final Report on BEPS Action 12 (Mandatory Disclosure Rules) which inspired a range of further Hallmarks. The Action 12 recommendations had, however, been fully implemented in the UK well before DAC6 (indeed, it might be said that the UK had implemented the recommendations even before they were made as a large number of them are based on the UK’s DOTAS regime and they afford States a significant margin of appreciation in respect of their domestic implementation).
So, in order to meet OECD-agreed standards, the UK would have had to implement only the MDR-element of DAC6 – and this is exactly what the amendment of the UK implementing regulations achieves by disapplying all Hallmarks other than D1 and D2. Indeed, we understand that the amendment of the UK implementing regulations is intended as a stop-gap and that the UK will, in due course, replace the amended regulations with its own model disclosure rules that implement the MDRs.
These circumstances may also go some way towards explaining the awkward timing of the amendment. Given that the UK implementing regulations had borrowed heavily from the EU directive, it had, for some time, been clear that they would have had to be amended in order to be workable after the transition period. It now appears that the UK Government delayed this amendment until the FTA had been agreed and it was clear that the FTA allowed the UK to disapply DAC6 (except in respect of Hallmarks D1 and D2).