In 2020 we had seen “The International Tax Enforcement (Disclosable Arrangements) Regulations 2020” implement UK tax reporting obligations associated with EU Directive 2018/822, commonly known as DAC6. This imposed a regulatory requirement on ‘intermediaries’ to report certain types of cross-border arrangements to HMRC, with reporting deadlines first arising on 30 January 2021.
We knew that Brexit put a question mark over the regime for UK purposes and on 30th December 2020, the Regulations were amended. Not only does this deal with the UK’s exit from the European Union (and no longer being a member state), but there is also a significant reduction in what needs to be reported to HMRC as a cross-border arrangement.
Having started with a number of ‘hallmarks’ in categories A through to E (all still detailed in HMRC’s guidance at the time of writing), only category D now applies. This is in line with the OECD’s mandatory disclosure rules (MDR) and further legislative change will come in 2021 to implement the MDR into UK domestic law. At this point, the UK DAC6 legislation will be repealed in its entirety.
The ICAEW have confirmed that the reduction in reportable hallmarks applies retrospectively as well, noting that arrangements were due to be reported where the first step was entered into on or after 25 June 2018. Only category D matters now needs to be considered.
Hallmarks in Category D
There are two such hallmarks as follows:
- D1 – Undermining reporting obligations
- D2 – Obscuring Beneficial Ownership
Hallmarks under category D are not subject to a main benefit test, and so are still reportable if the arrangement in question is not expected to generate a tax advantage.
D1 - Undermining reporting obligations
Cross-border arrangements will be caught by hallmark D1 if they have the effect of undermining or circumventing reporting obligations under DAC2 (Common Reporting Standard) or equivalent agreements on the automatic exchange of financial account information, or which take advantage of the absence of the automatic exchange of information (AEOI). More information can be seen in HMRC’s guidance here.
D2 - Obscuring Beneficial Ownership
Hallmark D2 applies where cross-border arrangements involve non-transparent legal or beneficial ownership chains which use persons (whether legal or real), legal arrangements or structures:
- that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
- 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; and
- where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.
This is therefore targeted at the use of offshore entities and structures with no real substance.
“Examples where beneficial owners are made unidentifiable include where undisclosed nominee shareholders are used, or where control is exercised indirectly, rather than by means of formal ownership. Beneficial ownership is also likely to be obscured where arrangements use jurisdictions where there is no requirement to keep information on beneficial ownership, or no mechanism to obtain it, or where there are no obligations or mechanisms to disclose the beneficial owners of shares held by nominees, or to notify the entity of changes in the ownership or control of the entity, or shares in it.”
More information can be seen in HMRC’s guidance here.
Reporting to HMRC
Reports must be made to HMRC for cross-border arrangements within category D within 30 days of the earliest of:
- when the arrangement is/was made available for implementation (on or after 1 July 2020);
- when the arrangement is/was ready for implementation (on or after 1 July 2020);
- when an intermediary provides aid, advice or assistance (on or after 1 July 2020), in relation to designing, marketing, organising, making available for implementation or managing the implementation of the arrangements, or
- when the first step in the implementation took place (on or after 25 June 2018).
If that date is between 1 July 2020 and 31 December 2020:
- The intermediary (or other person with a reporting requirement) must tell HMRC on or before 30 January 2021.
If the arrangement started between 25 June 2018 and 30 June 2020:
- The intermediary (or other person with a reporting requirement) must tell HMRC on or before 28 February 2021.
Legislation and HMRC guidance (IEIM620000) should be referred to to ascertain who has a reporting obligation.
New online form for reporting
A new online form for reporting was published by HMRC on 29 December 2020. The form and associated guidance can be viewed here.