11 May 2020

General description

• Finance Act 2019 introduced powers to allow the government to make regulations aimed at certain cross-border arrangements;
• These regulations will affect intermediaries, who design, promote, implement certain types of cross-border arrangements that could be used to avoid or evade tax. However, the regulations are far reaching and arrangements without a tax avoidance motive may also be caught;
• Affected intermediaries could include tax advisors, accountants, lawyers and wealth managers. Taxpayers who implement such arrangements will also be affected;
• Draft regulations were published for consultation in July 2019. The Government responded to these consultations on 13 Jan 2020. The regulations implement EU Directive 2018/822 (on Administrative Cooperation in the field of taxation known as DAC6). All other EU Member States are also required to implement this Directive, and tax authorities will share the information they receive under the Directive to identify and challenge tax non-compliance across international borders;
• The regulations are due to come into force on 1 July 2020. They will apply to arrangements that are made available for implementation or ready for implementation on or after that date. However, reports will also have to be made in respect of arrangements where the first step of the arrangement is implemented on or after 25 June 2018;

UK Implementation of DAC6

Reporting requirements

• As mentioned above, the reporting obligation applies primarily to ‘intermediaries’. However, a secondary obligation also applies to taxpayers. An intermediary is specifically designed as someone with an EU connection who ‘designs, markets, organises or makes available for implementation or manages the implementation’ of a reportable cross-border arrangement’. Such intermediaries are likely to include professional advisers such as lawyers, accountants and tax advisers. However, banks, financial advisers and, more generally, parties involved in transactions who could be considered to fall under any of the categories above are likely to be included. In addition, the definition of intermediary also refers to any person who undertakes to provide aid, assistance or advice in respect of a reportable cross-border arrangement, or any person who could reasonably be expected to know that such aid, assistance or advice relates to a reportable cross-border arrangement;
• It is important to bear in mind that according to the regulations there is no obligation to report if to do so would breach national rules on legal professional privilege (LPP). In this case the intermediary must notify another intermediary, or the relevant taxpayer, that they are obliged to make a report instead;
• In the event that no intermediary exists, or LPP means that there is no intermediary that can make a report, the obligation to report falls instead on the relevant taxpayer. The relevant taxpayer means any person to whom a reportable cross-border arrangement is made available for implementation or who is ready to implement a reportable cross-border arrangement, or who has implemented the first step of such an arrangement.

Legal professional privilege

• One issue that particularly concerned lawyers  was that the draft regulations and certain statements in the consultation document seemed to threaten legal professional privilege. This was a real concern as it put legal professionals in the difficult position of either breaching their obligations under DAC 6 or breaching their obligations towards their clients, potentially infringing fundamental rights which are designed to protect access to justice;
• Fortunately, HMRC has taken on board comments made during the consultation process. It has  incorporated a few simple but important changes to the final UK regulations to ensure that they do not require a lawyer to breach privilege not only vis-à-vis HMRC but also other parties, including other intermediaries;
• HMRC will have to set out exactly what it considers is and is not covered by privilege in this context. It has indicated that it intends to work with representatives from the legal sector to provide further guidance in this area. Hopefully, HMRC has now moved away from earlier statements that suggested factual information is not capable of being privileged. It is understood that HMRC will consult on mechanisms for law firms to notify other intermediaries and/or defend themselves from penalties without breaching privilege.

Reportable arrangements

• According to the regulations, an arrangement will be reportable if it meets at least one of five ‘hallmarks’ categories. The hallmarks are listed in Annex IV to DAC 6. They are described as presenting an indication of a potential risk of tax avoidance. However, it’s important to note that there is no requirement for a tax avoidance motive. The hallmarks are very wide and have the potential to catch a large number of transactions that would not normally be regarded as involving tax avoidance;
• The hallmarks are divided into ‘generic’ and ‘specific’. For hallmark categories A, B and certain elements of category C, an arrangement will only be reportable if it is also captured by the ‘Main Benefit’ test;

The main benefit test

• All of the generic hallmarks, and some of the specific hallmarks, are only taken into account for the purposes of DAC 6 if they fulfil the main benefit test;
• The main benefit test is satisfied if the main benefit or one of the main benefits which, having regard to all relevant facts and circumstances, a person may reasonably expect to derive from an arrangement is the obtaining of a tax advantage;

Definition of ‘cross-border arrangement’

An arrangement is considered as cross-border if it meets any of the following criteria:

• not all participants in the arrangement are tax resident in the same jurisdiction;
• a permanent establishment linked to any of the participants is established in a different jurisdiction and the arrangement forms part of the business of the permanent establishment;
• at least one of the participants in the arrangement carries on activities in another jurisdiction without being resident for tax purposes or creating a permanent establishment situated in that jurisdiction;
• at least one of the participants has dual tax residency for tax purposes;
• such an arrangement has a possible impact on the automatic exchange of information or the identification of beneficial ownership.

It’s important to note that cross-border tax planning arrangements may concern all taxpayers, including natural persons, legal persons (i.e. companies) and legal arrangements (i.e. trusts and foundations).

‘HALLMARKS’

The five Hallmark categories are the following:

• Category A – Generic hallmarks linked to the main benefit test: arrangements that give rise to performance fees or involve mass-marketed schemes;
• Category B – Specific hallmarks linked to the main benefit test: this includes certain tax planning features, such as buying a loss-making company to exploit its losses in order to reduce tax liability. Another example would involve arrangements aimed at converting income into capital in order to obtain a tax benefit;
• Category C – Specific hallmarks related to cross-border transactions: a few of these hallmarks are also subject to the main benefit test. For example, deductible cross-border payments between associated enterprises where the recipient is essentially subject to no tax, zero or almost zero tax. Another hallmark is about deductions for the same depreciation on an asset claimed in more than one jurisdiction;
• Category D – Specific hallmarks concerning the automatic exchange of information and beneficial ownership. An arrangement is reportable if it undermines the rules on anti-money laundering, transparency of beneficial ownership or the automatic exchange of financial account information;
• Category E – Specific hallmarks concerning transfer pricing. These include the use of unilateral safe harbours, the transfer of hard-to-value intangible assets when no reliable comparables exist and the projection of future cash flows or income are highly uncertain.

Reporting obligations

UK intermediaries

Information on reportable cross-border arrangements must be filed with HMRC within 30 days beginning on the day after the reportable cross-border arrangement is made available for implementation, is ready for implementation, or when the first step has been implemented, whichever occurs first.

If the intermediary meets the definition of an intermediary because they have provided aid, assistance or advice, they must report within 30 days of giving that aid, assistance or advice.

The above reporting does not apply to a UK intermediary in relation to a reportable cross-border arrangement in the event that

• the intermediary is liable to file information in relation to the reportable cross-border arrangement with the competent authorities of another member State which when applying the list in Article 8ab(3) (i.e. member State of tax residence, permanent establishment, income generation or activity) of the DAC features before, or in the same paragraph as, the United Kingdom, or

• another intermediary who participates in the reportable cross-border arrangement has made a return setting out the reportable information required to be reported by the intermediary in relation to the reportable cross-border arrangement, and

the intermediary has evidence that the reportable information required to be reported by the intermediary in relation to the reportable cross-border arrangement has been filed or returned.

UK relevant taxpayers

If the reporting obligation falls on the relevant taxpayer, they must make a report within 30 days.

A UK relevant taxpayer does not have to make a return in relation to a reportable cross-border arrangement in the event that:

• the relevant taxpayer is liable to file information in relation to the reportable cross-border arrangement with the competent authorities of another member State which when applying the list in Article 8ab(7) (i.e. member State of tax residence, permanent establishment, income generation or activity) of the DAC features before the United Kingdom;
• Another relevant taxpayer
  • agreed the reportable cross-border arrangement with the intermediary, or
  • if there has been no such agreement, manages the implementation of the reportable cross-border arrangement, and the relevant taxpayer has evidence that the reportable information in relation to the reportable cross-border arrangement has been filed or returned.

Relevant taxpayers must file information about their use of the arrangement in each of the years for which they use it.

Arrangement reference number

HMRC must allocate a reference number to the reportable cross-border arrangement and notify that number to that person.

A UK intermediary or UK relevant taxpayer then must notify that number to the relevant UK intermediary or UK taxpayer within 30 days.

Electronic return system

A return must be made electronically to HMRC using an electronic return system.

The form and manner in which a return should be made is specified in specific or general directions given by the Commissioners for HMRC.

Any other form of return will not be accepted and it will be treated as not having been made. An electronic return system must incorporate an electronic validation process.

Provision of information

To determine if the obligations arising under the regulations have been complied with, HMRC may require the intermediary or relevant taxpayer to provide such information or documents as the officer reasonably requires as specified by written notice.