Why you should care about DAC6
From 1 July 2020, taxpayers and their advisers will have a new set of disclosure rules to get to grips with.
These new rules, based on an EU Council Directive (the sixth version of the EU Directive on administrative cooperation – commonly referred to as DAC6), require cross border tax arrangements which meet the required conditions to be reported to either HMRC or another tax authority in the EU.
Whilst this may sound like something which is only relevant to large corporate groups and their advisers, the DAC6 rules actually have a surprisingly wide scope.
Given how detailed the rules are, this article is not intended to provide a comprehensive analysis. Instead, it simply highlights why anyone with clients with overseas interests might want to take a closer look at DAC6.
A wide range of arrangements can be caught
The DAC6 legislation is very detailed, but in essence an arrangement will be reportable if it:
An arrangement is defined widely to include any scheme, transaction or series of transactions. In order to be cross border, the arrangement must, very broadly, involve either parties which are tax resident in, or activities which take place in, more than one country (of which at least one must be the UK or an EU member state). Examples of cross border arrangements could include a loan or other payment from a resident of one country to a resident of a different country, or an individual settling funds in an offshore trust.
The hallmarks are set out in Annex IV of the DAC6 Directive. There are 15 in total, grouped into five categories A-E.
They include some generic hallmarks which may be familiar from other disclosure regimes, such as imposing confidentiality requirements, fees being linked to a tax advantage and the use of standardised documents.
However, they also include specific types of arrangements such as loss buying, converting income into capital, claiming double tax relief or depreciation in more than one country and payments between related parties where the recipient pays little or no tax.
Other hallmarks cover transfer pricing arrangements and attempts to undermine other reporting obligations or obscure beneficial ownership.
In essence, if you are advising on any cross border arrangement or transaction it is worth checking the list of hallmarks in Annex IV to see if they might apply.
It’s not just for promoters
A disclosure obligation can arise under DAC6 for intermediaries, and in some cases, taxpayers. As this article is primarily for agents and advisers, we won’t consider the position for taxpayers in any detail.
The definition of intermediary for these purposes includes any person who “designs, markets, organises or makes available for implementation or manages the implementation of a reportable cross-border arrangement”. It’s therefore clear that those who promote, sell or design tax schemes are likely to fall within DAC6.
However, the scope of DAC6 isn’t restricted to these obvious targets – the definition of intermediary also extends to any person who “knows or could be reasonably expected to know that they have undertaken to provide, directly or by means of any other persons, aid, assistance or advice” with respect to the activities mentioned above. This could include those who knowingly finance, advise on or assist with executing cross border arrangements.
No motive test
There is no clear motive test in the DAC6 rules, and it is therefore important to carefully analyse any advice you have given in respect of cross border arrangements to see if they could be caught.
There is a main purpose test which has to be met for some, but not all, of the hallmarks to apply. This test will be met if it “can be established that the main benefit, or one of the main benefits which, having regard to all the relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of tax advantage” which “cannot reasonably be regarded as consistent with the principles on which the relevant provisions…. are based and the policy objective of those provisions”.
Note that the main purpose test doesn’t require you to look at the reason the arrangements were entered into, but merely what the main benefits of them were in practice. As already noted, the test doesn’t apply to all of the hallmarks, meaning the main benefit won’t always be relevant when deciding whether or not to disclose.
There are reporting requirements (and penalties if you get it wrong!)
If you decide that you do need to make a disclosure as an intermediary under DAC 6, you need to move fast. Disclosures need to be made using a new (yet to be launched) online service within 30 days of providing the aid, assistance or advice which makes you an intermediary (or, if you are a promoter, the earliest of the arrangements being available / ready for implementation or the first step taking place). Depending on the nature of the arrangements, you may also have an ongoing reporting obligation every three months.
If you fail to make a required report, you could be subject to both fixed penalties of up to £5,000 and further daily penalties of £600 a day.
You have to look backwards as well as forwards
Although the DAC6 rules come into force in the UK on 1 July 2020, it’s not just a case of looking at activities carried out after that date.
The rules also apply to any reportable arrangements where the first step took place after 25 June 2018, meaning you will have to look back at all arrangements you have been involved with over the last two years. Depending on the records kept, level of staff turnover and volume of transactions, this could prove to be a challenge.
Those who think they could be affected by DAC6 may want to take a look at the EU Directive and the recently approved regulations for implementing it in the UK. HMRC are also currently working on detailed guidance, which should shed more light on exactly what kind of activities might (and might not) bring an adviser within the DAC6 rules.
Finally, although we left the EU on 31 January, it looks like the UK is going ahead with DAC6 regardless – so there is no excuse for ignoring it.