DAC6: UK “reprieve”

07 January 2021

Last week the UK released revised DAC6 Regulations as part of the EU exit package. The Regulations were entirely unexpected, and will have a significant impact on UK reporting requirements.

What has changed?

The EU’s DAC6 reporting regime applies to certain “cross-border arrangements” which, if they meet prescribed hallmarks, must be reported to an appropriate tax authority. In the EU, the full DAC6 regime is live and now mandates real time 30 day reporting of any impacted arrangement (business as usual reporting). In addition, it requires the reporting of certain historic arrangements under a look-back process (legacy reporting).

Last week’s UK release disapplies the majority of the EU’s DAC6 hallmarks, leaving one hallmark only. This is hallmark D, which catches the use of opaque offshore structures and the avoidance of reporting under the Common Reporting Standard (CRS).

The approach aligns the UK with OECD rules rather than EU rules. HMRC has indicated that over the coming months it will consult on and implement the OECD’s disclosure principles as part of the transition from EU to international rules. The expectation is that HMRC will preserve the basic DAC6 framework and concepts (including, for example, the “reportable cross border arrangement” and “intermediary” definitions, reporting nexus, and the legal professional privilege exception), but apply them to hallmark D situations only.

What does this mean for you?

The hallmark: hallmark D is in two parts, dealing as it does with the use of opaque offshore structures and the avoidance of CRS reporting. In either case a “bad motive” is widely considered to be required in order for the hallmark to apply. Accordingly, the number of UK reports is expected to be low.

The regime: the regime is a penalty regime and so, notwithstanding its relaxation in the UK, procedures will still be required to ensure compliance both locally and internationally. As the DAC6 framework is likely to prevail in the UK, a general level of awareness, perhaps supported by some ongoing training, will continue to be important here as in all affected countries.

Lookback: the UK changes apply going forward (for business as usual) and also in relation to the lookback period (25 June 2018 onwards). This means that UK lookback reporting now needs to address hallmark D alone.

Non-UK jurisdictions: the changes are UK only. And so where an arrangement involves the UK and a non EU Member State only hallmark D will be relevant now. However, where an EU Member State is involved in a cross-border arrangement, that country’s DAC6 regime will apply, so all hallmarks will be in point.

Complexity: local variations, by country, continue to be a challenge. And so while the UK developments are to be welcomed, they do introduce yet another local variation. Internal DAC6 processes will need to pick up all local country differences, tracking the rules and the “arrangements” concerned on a real time basis. This will continue to require a degree of coordination in order to manage, country by country, the DAC6 analysis, intermediary involvement, reporting obligations and responsibilities, and reporting status.

Risk management: DAC6, however broad its ambit, continues to be a risk, particularly in light of its complexity and the sanctions for non-compliance. The relaxation of the UK rules, while helpful, will not change its importance as a significant cross-border risk management issue.

The future: HMRC has indicated that it intends to implement the OECD’s mandatory disclosure principles, and that it will consult before doing so. The expectation is that the UK regime will continue to address hallmark D considerations only, although until the process is concluded there can be no certainty here, whether in terms of regime scope or hallmark interpretation.

If you would like to discuss, or would like further information regarding the UK position or DAC6 generally, please let me know.

Get in touch