UK reduces the scope of mandatory reporting requirements in relation to DAC 6

In a surprising U-turn, coinciding with the end of the UK-EU Brexit transition period, the UK has dramatically reduced the scope of DAC 6 reporting obligations in the UK.

EU Council Directive 2011/16 (known as DAC 6) requires UK intermediaries or taxpayers to report information regarding cross-border arrangements which meet one or more specified “hallmarks” and which concern at least one EU country.

Under the Free Trade Agreement agreed between the UK and the EU on 24 December 2020, the UK is only required to ensure any legislation it implements at the end of the transition period, relating to the exchange of information concerning potential cross-border tax planning arrangements, offers the level of protection provided for by the “standards and rules which have been agreed in the OECD…” and, accordingly, the UK is no longer required to implement DAC 6 in its entirety.

Following this, the UK government has confirmed it will follow the OECD Mandatory Disclosure Rules (“MDR”) and that DAC 6 reporting will continue, but for a limited period of time, and only to the extent that an arrangement is reportable by reason of a “Category D” hallmark.

Broadly, an arrangement will be reportable under a Category D if the arrangement either:

• has the effect of undermining reporting obligations under agreements for the automatic exchange of information; or
• involves non-transparent legal or beneficial ownership chains that:
  • do not carry on a substantive economic activity;
  • 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; and
  • have unidentifiable beneficial owners.

The UK government has indicated that it will shortly consult on a new UK-specific regime implementing OECD minimum standards, following which the UK’s DAC 6 implementing regulations will be repealed.

It is clear that the amendments to the Regulations have reduced the scope of disclosures to HMRC under DAC 6. However, a full DAC 6 assessment will still be required in respect of EU jurisdictions involved in a transaction, in order to determine whether a DAC 6 filing obligation arises out with the UK prior to the first reporting deadline of 31 January 2021. Cross-border transactions that would otherwise have been reportable to HMRC may need to be reported to EU tax authorities.

Please don’t hesitate to get in touch should you wish to discuss this change further and how it may affect your business.