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How to apply the EU tax rules
The main purpose of EU Directive 2018/822 (DAC 6) is to prevent the promotion and use of potentially aggressive tax planning schemes by intermediaries and users.
For information on the introduction of the new rules, our view on the changes and the timeline, see DAC 6: Implementing the new EU tax reporting rules in the UK.
Transactions the rules apply to
The Directive and the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (the Regulations) apply to ‘reportable cross-border arrangements’.
A cross-border arrangement is one that involves a participant in an EU member state and is not purely domestic. Reportable cross-border arrangements are broadly defined, which means that the rules may have consequences for non-tax driven transactions.
The Directive sets out a series of 'hallmarks' of distinct features linked to tax and tax reporting, which, if applicable, make the arrangement reportable.
UK Regulations made on 29 December 2020 significantly limited the scope of DAC 6 reporting in the UK. Only arrangements bearing one of the hallmarks under category D of DAC 6 are retained for UK reporting purposes.
The D hallmarks cover arrangements, broadly speaking, of two types:
- arrangements which may have the effect of undermining reporting obligations concerning the automatic exchange of information
- arrangements which obscure beneficial ownership
Read more about these hallmarks in HMRC's International Exchange of Information Manual.
We understand that the UK will consult on and implement a new regime around the OECD's Mandatory Disclosure Rules as soon as practicable to replace DAC 6.
Date the rules come into force
Reports in the UK need to be made by reference to various trigger dates for arrangements:
- if the first step in the implementation of a reportable arrangement was taken between 25 June 2018 and 1 July 2020, the arrangement must be reported by 28 February 2021
- if the relevant reporting trigger fell between 1 July 2020 and 31 December 2020, the arrangement must be reported by 30 January 2021
- if the reporting trigger falls on or after 1 January 2021, the arrangement must be reported within 30 days
Originally, the first reporting deadlines under DAC 6 were due to happen in July and August 2020. However, on 24 June 2020, the EU Council announced it had adopted an amending directive to DAC 6 providing an optional six-month delay to the reporting deadlines due to the disruption caused by the coronavirus (COVID-19) pandemic.
The amending directive also provided for the possibility of the EU Council unanimously agreeing to one further extension for a maximum additional three months.
In response, HMRC confirmed in June 2020 that the UK was taking up the optional six-month deferral and that the government will amend the UK Regulations that implement DAC 6 to give effect to this.
The amending Regulations were made on 9 July 2020 and came into force on 30 July 2020, which is after the original regulations came into force on 1 July 2020. However, HMRC confirmed that no action will be taken for non-reporting during the period between 1 July and the date the amending Regulations come into force, so that there was no expectation that reports needed to be made in July 2020.
Changes to HMRC’s international manual detailed how the deferral worked in practice.
Who the rules apply to
The Directive applies to any intermediary that:
- makes available for implementation
- manages the implementation of
a reportable cross-border arrangement.
It also covers those who provide aid, assistance or advice knowingly, or where they can be reasonably expected to know this is what they’ve done.
The definition of intermediary is subject to an exception for employees where the employer is an intermediary (see Regulation 13). Employees within the exception do not have to report in their personal capacity. However, this exception does not appear to cover all individuals who work in organisations that are intermediaries.
For example, it currently appears that partners in partnerships can be intermediaries (although the guidance indicates that partnerships will be able to make reports on behalf of partners who would otherwise have to report separately).
If the intermediary is located outside the EU or is subject to professional privilege or other secrecy rules, the obligation to report passes to the relevant taxpayer in relation to the arrangement.
In instances where there’s no intermediary (that is, where the scheme is designed in-house), the taxpayer must still report the arrangements to HMRC.
How the rules work
The Directive covers any cross-border arrangement if it bears the hallmarks defined in the Directive.
However, as explained above, the UK Regulations made on 29 December 2020 limited the scope of DAC 6 reporting in the UK, so that only arrangements bearing the D hallmarks apply to reporting in the UK.
If you’re a lawyer acting as an intermediary, subject to the legal professional privilege (LPP) exception, you must report to the relevant tax authority within 30 days of when the arrangement is made available, is ready for implementation or has started to be implemented – whichever occurs first, or of when the aid, assistance or advice is provided.
You have to report information which is in your knowledge, possession or control.
Information which should be reported
The portal for DAC 6 reporting to HM Revenue and Customs (HMRC) is open, with the first reporting deadline falling on 30 January 2021.
Each member state will agree the scope and format of the information to be reported to its respective tax authority.
However, basic information for reporting purposes will include identifying intermediaries and relevant taxpayers, including their:
- residence for tax purposes
- tax identification number (TIN)
- date and place of birth (in the case of an individual)
- where appropriate, the persons that are associated enterprises to the relevant taxpayer
Other information will include:
- the hallmark(s) that gives rise to the reporting obligation
- the value of the reportable cross-border arrangement
- a summary of the arrangement(s), including start dates and any domestic tax rules that apply
- a description in abstract terms of the relevant business activities involved (some protection will be given to specific information)
- details of the other member states involved, or likely to be concerned by the arrangement, and the person(s) that may be affected