DAC 6: Implementing the new EU tax reporting rules in the UK

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.

The Directive requires intermediaries (including lawyers) (see Who the rules apply to) to report certain cross-border arrangements to tax authorities of EU member states. Those tax authorities will then exchange relevant information with each other on a quarterly basis.

Read our guidance on applying the rules

On 9 January 2020, the International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (the Regulations) were made. These implemented EU Directive 2018/822 into UK law. On 1 July 2020, HM Revenue and Customs (HMRC) published guidance on the rules.

On 9 July 2020, amending Regulations were made to the first reporting date by six months from the original first reporting dates in July and August 2020 to new first reporting dates in January and February 2021 (see Date the rules come into force).

Importantly, on 29 December 2020, further amending Regulations were made to significantly reduce the scope of arrangements that need to be reported in the UK under the rules (see DAC 6 update: significantly reduced scope and planned replacement).

This means that from January 2021 the reporting obligations apply to a limited variety of arrangements (see Transactions the rules apply to) including those entered into from 25 June 2018.

What this means for solicitors

The Regulations implementing DAC 6 in the UK require intermediaries involved in designing and promoting certain cross-border arrangements which satisfy hallmarks linked to tax or tax reporting to report those arrangements to HMRC.

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.

Notwithstanding this reduction in scope, DAC 6 reporting requirements will change how solicitors who advise on cross-border arrangements report and carry out compliance.

While the rules, as a whole, were introduced to tackle aggressive tax planning, they apply more broadly. The rules may apply to you even if you do not advise on tax issues.

If you’re responsible for risk and compliance, you may wish to review your firm’s internal processes to ensure that everyone is compliant.

Consultation

The government consulted on a draft of the Regulations over summer 2019.

Our response to that consultation urged the government to take a proportionate approach to transposing the directive into UK law – for example, that the penalty regime should be in keeping with its aim. We gave detailed comments on what the regulations should cover in order to achieve this.

Outcome

On 13 January 2020, HMRC published a summary of responses to the consultation.

The summary of responses and changes to the Regulations recognise several points we raised in our consultation response, including:

• changes to help safeguard legal professional privilege (LPP)
• amendments to the penalty regime
• a limit on the definition of ‘tax advantage’ only for taxes covered by the Directive

The change to help safeguard LPP in the Regulations was an expanded exception for intermediaries where the relevant information would be subject to LPP.

The government agreed with our and other stakeholders’ view that the rules as originally drafted could make it more difficult to ensure that LPP was not breached.

How the reporting requirements interact with LPP

The interaction between DAC 6 reporting obligations and LPP remains an important issue for members. 

Read our Q&As on the implications LPP has for lawyers reporting under DAC 6

Our view

We welcome the positive changes that were made to the Regulations in response to the consultation process.

We also welcome the publication of HMRC guidance and HMRC’s continuing willingness to take comments on it. 

Next steps

The UK DAC 6 reporting portal is now open, with first reports under the UK implementing regulations due from 30 January 2021, so law firms should continue their DAC 6 compliance work as appropriate.

We recommend that members continue to review, monitor and record relevant reportable arrangements under the applicable rules (which apply to arrangements in respect of which the first implementation step has taken place since 25 June 2018) and ensure they make any necessary reports to HMRC within the relevant deadlines.

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.

Timeline

January 2021 – the portal for DAC 6 reporting to HMRC opened, with the first reporting deadline falling on 30 January 2021

December 2020 – the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No 2) (EU Exit) Regulations 2020 were made by HM Treasury on 29 December 2020 to legislate for the reduction in scope of DAC 6 reporting requirements in the UK following the end of the Brexit transition period

July 2020 – the International Tax Enforcement (Disclosable Arrangements) (Coronavirus) (Amendment) Regulations 2020 were made by HM Treasury to legislate for the six-month deferral of reporting deadlines previously communicated in June

July 2020 – HMRC published guidance on the rules

June 2020 – HMRC confirmed that the UK is 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

June 2020 – EU Council announced that it has 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

January 2020 – HMRC published a summary of responses to its consultation

January 2020 – the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, Statutory Instrument 2020 No. 25 (the Regulations) were made by HM Treasury

October 2019 – we published our response to the consultation

July to October 2019 – government consulted on a draft of the Regulations