UK taxpayers and their advisors will, from 1 July 2020, be subject to yet another regime requiring disclosure to HMRC of their tax affairs. Failure to comply with these new rules can result in fines of up to £1 million.
The new rules will be implemented pursuant to a Directive (the Directive) and will operate in addition to the UK’s existing Disclosure of Tax Avoidance Schemes regime (DOTAS), raising the question of whether those subject to the rules will be required to make a double disclosure of the same information or be subject to double penalties for the same offence.
Whilst for the most part the draft UK regulations to implement the new rules are consistent with the Directive, there are instances where the UK rules will go beyond the Directive’s scope. Most notably the rules will apply where there are specified arrangements involving a UK party that results in a tax advantage for a person anywhere in the world (not just in the EU).
HMRC has confirmed that the rules will remain in place post-Brexit.
The UK Regulations
On 22 July 2019, the UK HM Revenue & Customs (HMRC) published long awaited draft regulations implementing the Directive regarding the automatic exchange of information in relation to cross-border tax arrangements (referred to as “DAC 6”).
The new rules will require taxpayers to share specified information with HMRC. HMRC will then be required to share the same information with other EU Member States.
Failure to comply with the new rules will result in similar penalties to those currently imposed under the DOTAS regime, but include a power for the UK courts to impose a penalty of up to £1 million if the normal penalties appear “inappropriately low.”
When will a disclosure obligation arise?
With effect from 1 July 2020, details of reportable transactions must be disclosed to HMRC where (a) the first step arose after 25 July 2018 and (b) they involve taxpayers in one or more EU Member State(s).
Reports must, generally, be made within 30 days of the arrangements being made available or becoming ready for implementation (whether or not implemented).
To be reportable, transactions must satisfy certain “hallmarks” and in most cases the arrangements must have the obtaining of a tax advantage as one of its main purposes.
However, not all of the hallmarks require arrangements to be tax motivated, and businesses and their tax advisors will need to be particularly cautious in these cases. By way of a simple example, an arm’s length commercial payment that results in a tax deduction for the payer but no, or very low, tax for the recipient (e.g.. due to a generally low/no tax rate on income, or because a specific exemption from tax applies in that jurisdiction) may be disclosable.
Who must disclose?
The draft regulations primarily require “intermediaries” (which will include law firms, accountants and others involved in the design or implementation of the relevant transaction) to provide prescribed information to HMRC.
In certain circumstances, such as where there is no intermediary or where legal professional privilege applies, the duty to disclose will fall on the taxpayer itself.
What information must be disclosed?
If the regulations apply, the details of the arrangement must be shared with HMRC, including:
- details of the intermediaries (if any) and the relevant taxpayer (including names, jurisdictions of tax residence, taxpayer identification numbers, and date and place of birth (in the case of an individual));
- the hallmark(s) which make(s) the arrangement reportable;
- a summary of the arrangement (including the value);
- the date on which the first step to implement the arrangement has been (or will be) made; and
- the EU Member State of the relevant taxpayer(s) and any other EU Member States which are likely to be concerned by the arrangement.
The intermediary or taxpayer will then be allocated an arrangement reference number (ARN) which intermediaries must notify to other intermediaries and taxpayers (within 30 days). Where a UK resident taxpayer has an ARN, it must also put this in its return and state “the effect of the reportable cross-border arrangement on the tax affairs of the relevant taxpayer for that tax year or period of account.”
Alongside the draft regulations, HMRC released a consultation document on the new rules and has invited responses by 11 October 2019. The final regulations will be enacted by 31 December 2019.
The consultation provides some helpful insights into how HMRC is likely to apply the rules in practice. However, there are still many areas of uncertainty which it is hoped will be covered either in the final regulations or the accompanying guidance. Examples include:
- How the regulations will apply where EU member states have implemented the requirements of the Directive differently.
- How certain aspects of the rules will operate when statutory reliefs are available.
- How the rules operate alongside the existing DOTAS rules.
- Which, and how many, entities in multi-national groups will be required to disclose to HMRC (and other EU tax authorities).
- Why the UK considers the rules should apply to non-EU taxes.