The UK has worked closely with the OECD, the EU Commission and other EU member states to introduce the Directive on Administrative Cooperation (DAC) in 2011 to find ways to effectively identify and tackle these kinds of arrangements.
The latest amendment to the DAC is commonly known as DAC 6, which was effective on 25 June 2018. Member states were in principle required to put in place legislation giving effect to the provisions of the Directive by 31 December 2019.
DAC 6 imposes mandatory reporting of reportable arrangements which:
The hallmarks are characteristics commonly seen in arrangements which could be used to avoid or evade tax but as drafted, they can also catch many commercial arrangements.
From a UK perspective, DAC 6 covers all EU taxes other than VAT, customs duties, excise duties and mandatory social security contributions.
The legislation sets out who has to report, what arrangements have to be reported, the deadlines for reporting, and what information needs to be reported.
The reporting obligations fall on 'intermediaries' or, in some circumstances, the taxpayer itself.
Intermediaries who advise on cross-border transactions need to prepare so they can make any required report on time.
DAC6 applies to any person (including an individual, partnership, company or other legal entity) operating in the EU or with interests in the EU. So it could apply to multinational companies. It also applies to intermediaries such as law firms, accountants, banks and financial advisors.
DAC 6 is primarily aimed at intermediaries. However there are some circumstances where a taxpayer may have to make a report. If you are a taxpayer, this guide for taxpayers sets out some more information about 'Getting ready for DAC 6'.
HMRC issued the Regulations in January 2020 and the legislation came into force on 1 July 2020. HMRC published their guidance on the same date which is here. This means that DAC 6 will still apply to the UK even though is not a member of the EU following Brexit. (However as matters stand at the time of writing, once the transition period ends on 31 December 2020 the requirement to make future reports will be limited to cross-border arrangements that involve the EU member states).
In order to assess whether a report may need to be made, any arrangements should be assessed against the following questions:
Due to COVID-19, the reporting deadlines were extended with the first notifications required by 30 January 2021 for the period from 1 July to 31 December 2020 and by 28 February 2021 for the period before 1 July 2020 (when the rules come into effect). These must include reporting arrangements where the first step of the arrangement was made after 25 June 2018 (when the directive came into force) and before 1 July 2020.
Do you need to make a DAC 6 report
and if so, what information needs retaining,
when to report and who has to make the report.
The implementation of the extension means:
Thereafter (excluding cases involving legal professional privilege), reports (for both intermediaries and taxpayers) will need to be filed within 30 days of the earlier of the day on which the arrangement is made available for implementation, the day it is ready for implementation, and the day the first step in implementation is made.
There are ongoing quarterly reporting obligations for 'marketed arrangements' – marketed tax schemes which can be implemented with minimal customisation.
Non-compliance by either intermediaries or taxpayers will attract penalties. These can be broadly up to £5,000 or a daily penalty of £600 for continuing failure.
The information to be reported is listed in the Directive:
Whichever intermediary/taxpayer is making the report will clearly need to devote time to collating information, but will also need to ensure others involved are lined up to cooperate with this process. Even if you are not the intermediary responsible for making the report, you will need to retain confirmation that another intermediary is making the report.
If you need any further assistance regarding DAC 6, please contact Jane Mackay, Head of Tax.
Purely domestic arrangements which do not impact tax in another jurisdiction are not the target of this regime. Even though the UK is leaving the EU, the UK is equivalent to an EU member state for DAC 6 purposes.
The hallmarks are broad categories setting out particular characteristics identified as potentially indicative of aggressive tax planning.
The hallmarks are widely drawn and leave considerable scope for debate as to whether many 'ordinary' transactions and structures will be reportable in addition to planning that indicates, in the Commission’s words, 'potentially aggressive tax planning'.
The Directive does not contemplate any de minimis value for reportable arrangements and this is mirrored in the UK domestic legislation implementing the Directive.
This test is met where one of the main benefits expected from an arrangement is a tax advantage. This test does not require you to look at the reason the arrangements were entered into (i.e. it is not a motive test), but merely what the main benefits of them were in practice. If the tax outcome is of significance in the way it is decided to structure a transaction, disclosure should be the default course of action.
This terminology is used in other UK tax regimes and legislation, and is notoriously difficult to apply. Until the scope is clearly defined, it makes sense to interpret it widely.
In order to be an intermediary for the purposes of these disclosure rules, the intermediary must meet at least one of the following conditions:
Commercial characteristics seen in marketed tax avoidance scheme.
Taxpayer or participant under a confidentiality condition in respect of how the arrangements secure a tax advantage.
Intermediary paid by reference to the amount of tax saved or whether the scheme is effective.
Standardised documentation and/or structure which is available to more than one taxpayer.
Tax structured arrangements seen in avoidance planning.
Converting income into capital.
Circular transactions resulting in the round-tripping of funds with no other primary commercial function.
Cross-border payments and transfers broadly drafted to capture innovative planning – this may capture many ordinary commercial transactions where there is no main tax benefit .
Deductible cross-border payment between associated persons.
Deductions for depreciation claimed in more than one jurisdiction.
Double tax relief claimed in more than one jurisdiction in respect of the same income.
Asset transfer where amount treated as payable is materially different between jurisdictions.
Arrangements which undermine tax reporting/ transparency.
Arrangements which have the effect of undermining reporting requirements under agreements for the automatic exchange of information.
Transfer pricing: non-arm’s length or highly uncertain pricing or base erosive transfers.
Arrangements involving the use of unilateral transfer pricing safe harbour rules.
Transfers of hard to value intangibles for which no reliable comparables exist where financial projections or assumptions used in valuation are highly uncertain.
Cross-border transfer of functions/risks/assets causing a more than 50% decrease in earnings before interest and tax during the next three years.