Among the tax implications of the U.K. officially ending its status as a transitional member of the EU is a more relaxed approach to some mandatory reporting obligations.
In a surprising change that took effect when the U.K. officially departed the EU on Dec. 31, the U.K. broke with the EU on its sixth directive on administrative cooperation, known as DAC6.
DAC6 requires taxpayers to report certain cross-border transactions to increase international tax transparency. Since the inception of the rules, the U.K. has been aligned with the EU, under which circumstances transactions were reportable. And until the end of 2020, it was anticipated that such rules would carry over into the post-Brexit regime.
On Dec. 31, Her Majesty’s Revenue & Customs effected legislation summarily discarding the relevant EU DAC6 hallmarks, with the exception of Hallmark D.
The legislation revoked arrangements A, B, C, and E for 2021 and, most importantly, historical arrangements starting June 25, 2018.
The change was legislated via the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No. 2) (EU Exit) Regulations 2020. The explanatory note summarized the change as a DAC regulatory modification that is aligned with requirements of the Free Trade Agreement between the U.K. and the EU.
This change was largely communicated to tax advisers and the business community through notices published on HMRC’s website, notwithstanding the legislative documents that made it happen. Apart from a proactive monitoring of global tax developments, interested stakeholders should look to updated guidance posted in HMRC’s International Exchange of Information Manual.
Why Does Only Hallmark D Remain?
The September 2018 summary record of the OECD working party IV discussed DAC6, stating that compliance with mandatory disclosure rules against circumvention of the common reporting standard is equivalent to compliance with Hallmark D.
Additionally, the EU-U.K. Trade and Cooperation Agreement provided that “a party shall not weaken or reduce the level of protection provided for in its legislation at the end of the transition period below the level provided for by the standards and rules which have been agreed in the OECD at the end of the transition period.”
Hallmark D is a reportable arrangement if it undermines the Common Reporting Standard or has non-transparent legal or beneficial ownership chains.
What are the revised UK DAC6 hallmark D due dates?
- Due on Feb. 28, 2021: Historical arrangements June 20, 2018 to June 30, 2020
- Due on Jan. 30, 2021: Arrangements from July 1, 2020, to Dec. 31, 2020
- 30-day requirement: Arrangements commencing Jan. 1, 2021
Note, this reporting only affects U.K. DAC6 arrangements. For arrangements that include at least one of the 27 member states, there are no changes to the prior reporting dates, with relevant timeline delays as previously legislated.
However, it will be important to monitor specific member state legislation that would require reporting for arrangements, other than Hallmark D, between the U.K. and such a country.
HMRC guidance for the disclosure of tax avoidance schemes, known as DOTAS, remains in place.
DOTAS was introduced several years ago to minimize tax avoidance, which aligns with the U.K. approach to a self-assessment reporting obligation.
Apart from separate value-added tax rules, DOTAS comprises income and corporation tax, capital gains tax, national insurance contributions, stamp duty land tax, and other miscellaneous provisions.
HMRC also has a substantive penalty mechanism in place for non-disclosure.
Large corporations with U.K. presence also receive risk ratings based on regular reviews of their tax processes and filing obligations. This process is generally updated annually to apprise HMRC of tax-related activities of relevant entities.
How does this change affect U.K. intermediaries who may not have access to all details of the arrangements or countries thereto?
For arrangements, apart from Hallmark D, that have been drafted for submission, perhaps the reporting entity may flip from the U.K. to the EU member state, as a result of the lack of legislative coordination to share this information provided to the U.K.
Other questions remain, such as transitionary arrangements outlining the manner in which Hallmark D arrangements will be shared with other tax authorities, and important documents otherwise falling within the DAC regime.
The DAC rules, under Directive 2011/16/EU, has requirements for exchanging information about tax rulings, advance pricing agreements, EU Common Reporting Standards, country-by-country reporting, and beneficial ownership.
Other examples that expire include the parent-subsidiary directive and the interest and royalty directive. They will impact potential withholding taxes between relevant entities.
HMRC has indicated there will not be further DAC6 changes before 2022. However, it is not yet known how new U.K. legislation will affect other sharing mechanisms.
A Time for Change
The U.K. has successfully withdrawn its membership from the EU regime. However, this partnership had many effective guideposts with a wide impact on EU and U.K. taxpayers.
Following the DAC6 changes, it will be interesting to see how the prior interrelated EU rules unwind as part of new U.K. legislative efforts. Hopefully, the new rules will continue to foster simplicity, while retaining comprehensive safe harbors to enhance taxpayer certainty going forward.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Keith Brockman is a CPA, CGMA, and authors a Best Practices international tax blog at strategizingtaxrisks.com. He is a frequent presenter at international tax conferences, having over 30 years of experience as a corporate tax executive. He has served on tax committees in the U.S. and Europe with Tax Executives Institute and Manufacturers Alliance for Productivity and Innovation.