DAC 6: Disclosable arrangements - common questions and misconceptions

Misconception #1: “I don’t take the lead on any overseas transactions. I involve other advisers and therefore I can rely on them to make a report.”

There are still obligations applying to those who the legislation describes as ‘service providers’ – broadly those that do not take the lead on reportable transactions. While there are certain circumstances in which an adviser can rely on another adviser to make a report, the rules are complex and need careful management.

Given the complexities and tight timescale (broadly 30 days) for reporting many affected intermediaries may not be able or willing to rely on other advisers’ reports. Each engagement will need to be reviewed in isolation and the rules applied to the particular fact pattern.

A broad brush approach to reliance on others is not appropriate and will certainly not assist in mitigating penalties should an omission come to light. The legislation requires that those not making their own report but party to a reportable arrangement obtain the arrangement reference number (ARN) and details of the information that has been submitted as ‘evidence’ of another adviser making a report on which they are able to rely.

Misconception #2: “I am an individual or private client practitioner. I am not involved with corporates and therefore I’m not concerned.”

These rules can apply to private clients . For example, the rules target arrangements which involve ‘non-transparent legal or beneficial ownership chains’ and there is no requirement for a tax avoidance motive to be present. Offshore trusts could therefore be caught by these rules. Private client practitioners must therefore consider these rules carefully.

It is certainly true that the guidance is currently weighted more towards situations which involve companies, such as transfer pricing, and currently there appears to be a lack of clarity and awareness on the implication for private clients and this has been raised as an issue with HMRC.

Misconception #3: “I’ve heard something about a deferral and it doesn’t come in for a few months so I don’t need to think about this now.”

The rules are in place now, just with a delayed time-frame for reporting. The reporting obligations apply to arrangements where the first step was entered into on or after 25 June 2018. This means that at the first reporting deadline, a backlog of historical reports will need to be made.

At the end of June 2020, the EU announced that member states could delay reporting under DAC 6 by up to six months due to the impact of COVID-19. Following this the UK government has announced it is deferring the first reporting deadlines for six months. All transactions which should have been reported will still need reporting, albeit at a later date. This means:

• For arrangements where the first step in the implementation took place between 25 June 2018 and 30 June 2020, reports must be made by 28 February 2021, instead of 31 August.
• For arrangements which were made available for implementation, or which were ready for implementation, or where the first step in the implementation took place between 1 July 2020 and 31 December 2020, reports must be made within the period of 30 days beginning on 1 January 2021 (ie by 30 January 2021).
• For arrangements in respect of which a UK intermediary provided aid, assistance or advice between 1 July 2020 and 31 December 2020, reports must be made within the period of 30 days beginning on 1 January 2021 (ie by 30 January 2021).

The standard time limit for reporting once the rules are fully operational will be 30 days, so affected organisations need to plan how they are going to manage reporting well before the rules come into force to ensure they are ready and do not miss what are very tight reporting deadlines.

It is also important to note that after 1 July 2020 different triggers for reporting come into force. So in the period 25 June 2018 to 30 June 2020 only transactions that are implemented may need reporting. After 1 July 2020 the provision of advice could trigger a reporting obligation, even if the arrangement is not implemented.

Misconception #4: “I’m an employee so it’s my employer’s responsibility to ensure compliance with the new rules.”

This assumption is only reasonable where the employer meets the definition of a UK intermediary. Broadly this will mean that UK employees of UK based entities will not be required to make personal reports in their own right. This duty will sit with the employer intermediary.

However, where the employer does not meet the definition of a UK intermediary, employees can become an intermediary in their own right and are required to make reports personally. This is most likely to happen where an employee is registered with a UK professional association but is employed by a non-EU employer. For example this would likely apply where people are sent on secondment from a UK firm to a non-EU jurisdiction but are involved in transactions which concern the EU.

While we understand it will be possible for the UK employer to make reports on behalf of the employee overseas, this does not remove the legal obligation from the employee. It is also unlikely that the UK entity will have sufficient oversight of work performed to identify affected transactions. Those employees working outside of the EU should work with their employer to consider how the rules might apply to them and agree an approach to manage compliance.

Furthermore, partners of professional firms will need to consider their position. Technically partners are not employees and therefore can be an ‘intermediary’ in their own right. HMRC has indicated that one partner may make reports on behalf of other partners but, should a compliance failure arise and a penalty incurred, it is the partner that was the intermediary that will be liable.

Misconception #5: “I work in-house and engage tax advisers so it’s their responsibility to ensure arrangements they’re advising on are reported.”

In certain circumstances the taxpayer themselves may have to make a report. This can happen where there is no intermediary report (eg, due to legal and professional privilege) or the taxpayer has extra information about the arrangement which is not included in the intermediary report. In-house professionals therefore need to take care that they identify situations where they are acting as some form of intermediary, and are meeting their obligations. The regime may also apply more broadly than to in-house tax professionals. For example, in-house lawyers, HR teams, treasury teams, etc, should consider their position. Any team that has responsibility for overseeing or directing an international project may need to be aware of the rules.

DAC 6 is the first directive in the series where the short form ‘DAC’ has been used. The other forms of administrative cooperation will be familiar.

• DAC 1 – replaced the EU savings directive and introduced sharing of information concerning:
  o income from employment;
  o directors fees;
  o pensions;
  o life insurance products; and
  o immovable property (income and ownership).
• DAC 2 – introduced the exchange of financial account information (the EU equivalent of FATCA and the common reporting standard).
• DAC 3 – introduced the automatic exchange of tax rulings and advance pricing agreements.
• DAC 4 – introduced the automatic exchange of country by country reports.
• DAC 5 – ensures tax authorities have access to beneficial ownership information collected pursuant to the anti-money laundering legislation.

What are the hallmarks which make arrangements reportable?

The hallmarks are very complex but can be broadly summarised into five main types.

Please note that, following the end of the Brexit transition period, the UK has decided to implement DAC 6 on a partial basis, such that only arrangements falling within category D hallmarks will be reportable to HMRC.

However, if you are an intermediary with a connection to an EU member state, you will need to apply the DAC 6 rules in the form they have been implemented in that state.

The five hallmark types:

A. General hallmarks mostly based around some of the UK’s disclosure of tax avoidance scheme (DOTAS) hallmarks and capture arrangements with red flags such as a confidentiality conditions, standardised documentation or contingent fees based on tax outcomes.

B. Specific hallmarks targeting specific types of transactions which are perceived to be aggressive including:

• the acquisition of a loss making company where the main trade ceases and use of those losses continues (loss buying)
• the conversion of income into a category of revenue taxed at a lower level or exempt
• arrangements which include circular transactions resulting in the round-tripping of funds.

Some of the types of arrangements which need to be considered carefully under hallmark B include structures involving a finance company, certain debt restructuring and M&A activity (particularly where funds are round-tripped), sale and leaseback transactions and incorporation of an overseas branch as well as certain remuneration strategies for individuals.

C. Hallmarks involving cross border transactions between associated enterprises, where mismatches arise. Examples include:

• where there is a deductible payment but no or minimal taxation arises on the receipt (eg, due to a preferential tax regime)
• where there are double deductions for depreciation
• where there are multiple claims for double tax relief
• asset transfers where the amount treated as payable is materially different between jurisdictions.

D. Hallmarks focused on avoiding automatic exchange of information, or structures with hidden beneficial ownership or instances where control is exercised outside the legal ownership chain. As discussed above this could affect some trust structures and therefore care is required.

E. Hallmarks focussed on transfer pricing issues, although they can apply more widely. It includes transfers of ‘hard to value’ intangibles between associated enterprises and also intra-group transfers that reduce the transferor’s projected three-year earnings before interest and taxes (EBIT) by more than 50%. They also touch on unilateral safe harbour rules.

It is expected that the hallmarks under category E could affect commercial transactions. For example, it is common for the valuation of intangibles to be challenging and therefore transfers of assets such as patents or licenses could be caught.

Some of the hallmarks are subject to a ‘main benefit’ test (A,B and partially C), while some are not (D and E). This means that the hallmark will only apply where one of the main benefits that may reasonably be expected to arise from the arrangement is a tax advantage. This is a very subjective test and local jurisdictional rules also need to be considered as well as the UK interpretation. It will be important that that this test is considered carefully and applied to the facts of each arrangement before being relied upon.

How will I make reports?

It is anticipated that reports will be made via an online form on the gov.uk website and intermediaries will need to register to make a report. Once the report has been validated, an arrangement reference number (ARN) will be issued. Intermediaries will be required to pass the ARN to intermediaries and relevant taxpayers. Taxpayers will have an annual reporting requirement (probably via the normal tax return process) to notify HMRC of the ongoing use of a disclosed arrangement.

What internal processes should my organisation be putting in place?

It is important that organisations implement effective systems to identify transactions which require disclosure. Organisations should consider undertaking a risk review to identify areas of their business which may be involved in reportable transactions. Training may well be needed within the organisation, particularly as these rules could impact non-tax professionals.

Where arrangements are identified which may be reportable, it is imperative that these are escalated appropriately within the organisation and the review and decision-making process is documented appropriately. HMRC and any relevant tax authorities of EU member states will be keen to assess the governance in place around DAC 6, particularly if any failures come to light and penalties are considered.

Can I outsource reporting and will I need specialist software to make a report?

Compliance with the rules will require continuous review and data gathering by in-house personnel close to the arrangement and therefore it is very unlikely that DAC 6 compliance and reporting could be entirely outsourced. It is expected some organisations will seek advice from external providers about their obligations to report and whether the hallmarks are met. In addition, some advisers may offer a service to make returns on a client’s behalf.

We are aware of software solutions being developed to assist organisations in gathering and assimilating information pertinent to any report. Each business will need to decide on an appropriate response which may or may not involve technology solutions. However, it is not expected that specialist software will be necessary to comply with the rules, particularly for those with a low volume of reports to submit.

DAC 6 is the first directive in the series where the short form ‘DAC’ has been used. The other forms of administrative cooperation will be familiar.

• DAC 1 – replaced the EU savings directive and introduced sharing of information concerning:
  o income from employment;
  o directors fees;
  o pensions;
  o life insurance products; and
  o immovable property (income and ownership).
• DAC 2 – introduced the exchange of financial account information (the EU equivalent of FATCA and the common reporting standard).
• DAC 3 – introduced the automatic exchange of tax rulings and advance pricing agreements.
• DAC 4 – introduced the automatic exchange of country by country reports.
• DAC 5 – ensures tax authorities have access to beneficial ownership information collected pursuant to the anti-money laundering legislation.