UK restriction of DAC6 Regulations following Brexit – good news for 2021

The start of 2021 has had its ups and downs. However, the New Year brought some welcome news for lawyers, accountants and other professionals in the UK working on cross-border transactions and other arrangements, and for their clients.

What was the good news?

The good news related to the announcement with effect from 11pm on 31 December 2020 that the reporting requirements under "DAC6" as it applies in the UK are now restricted to cross-border arrangements falling within one specific category of hallmark, Category D, rather than all of Categories A to E listed in DAC6. This change has retrospective effect, so it takes effect from the original implementation of DAC6 into UK law on 1 July 2020.

What is DAC6?

"DAC6" is the European Union's Directive on Administrative Co-operation in the Field of Taxation (Council Directive 2011/16). It is so-called because there have been five earlier such directives focusing on different fields.

On 1 July 2020, the International Tax Enforcement (Disclosable Arrangement) Regulations 2020 came into force in the UK. These implement the provisions of DAC6, requiring disclosure to the UK's national tax authorities, Her Majesty's Revenue and Customs ("HMRC"), of certain cross-border arrangements that potentially facilitate tax evasion or avoidance. Such arrangements are identified in DAC6 (and in the original UK implementing regulations) according to whether they meet certain hallmarks listed in Categories A to E.

So, what has changed?

Following the conclusion of the Free Trade Agreement between the EU and the UK, and with effect from the end of the Brexit transition period on 31 December 2020, the UK amended the DAC6 implementing regulations (the "DAC6 Regulations", as so amended). The arrangements that require identification are now restricted to those meeting only one category of hallmark. This is Category D, relating to arrangements that seek either:

1. To undermine reporting obligations under the Common Reporting Standard (CRS).
2. To obscure the beneficial ownership of any legal arrangement or structure.

The CRS referred to in Hallmark D1 is an OECD initiative that requires jurisdictions to obtain information from their financial institutions and automatically exchange that information with other jurisdictions on an annual basis. In most situations, it should be relatively straightforward to determine whether cross-border arrangements involve an effort to undermine obligations under the CRS.

In contrast, for the purposes of Hallmark D2, obscuring beneficial ownership is defined broadly as arrangements that involve non-transparent legal or beneficial ownership chains which use persons, arrangements or structures:

• That do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises.
• That 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 (the European Union's fourth money laundering directive), are made unidentifiable.

Almost any cross-border nominee arrangement could fall within this definition. However, HMRC's guidance in its internal manual is helpful in this regard, indicating that where a person is obliged to identify beneficial ownership under anti-money laundering legislation in accordance with FATF (the Financial Action Task Force), and successfully does so, this would generally mean that the test in the third limb of hallmark D2 was not met, as the beneficial owners would not be unidentifiable.

Given the stringent Know Your Client requirements to which UK and EU professionals are subject, it should be uncommon for this test to be met where professional intermediaries are involved. Of course, there may be circumstances under which the test is met nevertheless and, as a result, an arrangement would be reportable.

What constitutes an arrangement?

An "arrangement" for the purposes of the DAC6 Regulations is “any scheme, transaction or series of transactions”. However, this is not exhaustive, and it is generally necessary to look at any arrangement holistically, rather than looking at an arrangement as a series of small steps or separate transactions.

Where a pre-existing arrangement is being extended, this would not normally be viewed as a new arrangement, unless there is some material change.

Is an arrangement cross-border?

Following the end of the Brexit transition period, to be "cross-border" for the purposes of the DAC6 Regulations, an arrangement must concern either more than one "State", defined as an EU Member State or the UK, or one State and a third country.

What are the requirements of DAC6 generally and the DAC6 Regulations?

Under DAC6, the obligation to report an arrangement to the tax authorities falls primarily upon intermediaries involved in promoting, planning or advising on relevant types of cross-border arrangements. If there is no intermediary involved in a transaction, or the intermediary is prevented from reporting, perhaps as a result of the application of the rules of legal professional privilege, the obligation to report falls on the taxpayer, assuming the taxpayer is resident in the UK or an EU Member State.

For UK intermediaries and UK resident taxpayers, who are subject to the DAC6 Regulations, if a cross-border arrangement does not fall within either of the Category D hallmarks, there is no obligation to report. However, if a taxpayer or an intermediary involved in such an arrangement is resident in an EU member state, they may have an obligation under DAC6 (as implemented in their jurisdiction) to report the arrangement to their own tax authorities if it falls within another category of hallmarks. As this is not a matter of UK law, it falls outside the scope of this article, but such an intermediary or taxpayer would have to determine the position under the law of the relevant member state.

What are the relevant dates for the purposes of the DAC6 Regulations?

DAC6 applies to reportable cross-border arrangements that were entered into on or after 25 June 2018. The original dates for first reports to be made were delayed in many EU countries, including the UK, as a result of the coronavirus pandemic.

In the UK, under the DAC6 Regulations, for arrangements made available for implementation or where the first step was implemented between 1 July and 31 December 2020, the new deadline for a report to be made was 30 January 2021.

Relevant arrangements entered into between 25 June 2018 and 30 June 2020 are reportable by 28 February 2021, and those which became or become reportable on or after 1 January 2021, must be reported within 30 days of the relevant date. This date will be the day after the reportable arrangement is made available, or is ready to be implemented (i.e. the design has been finalised), or when the first step in its implementation has been made. For intermediaries who are service providers, it could also be the day after aid, assistance or advice (including legal advice) is provided in respect of the arrangement.

Going forward

The reporting rules under the DAC6 Regulations are intended to be temporary. The UK Government plans to consult on and implement the OECD’s Mandatory Disclosure Rules as soon as practicable during the course of 2021. This is with a view to replacing DAC6 entirely and transitioning from European to international rules. In the meantime, however, the current reporting rules remain in place.

If you have any queries with regard to the DAC6 rules as they apply in the UK, please contact your usual Forsters' contact or a member of our Regulatory group.

Nicole Aubin-Parvu is a Knowledge Development Lawyer, Julia Ramsden Gunduz is Counsel and Robert Payne is a Senior Associate in the Private Client team.