On 31 December 2020, the UK government published legislation that significantly restricts the scope in the United Kingdom of DAC 6, the mandatory disclosure regime for cross-border arrangements with certain taxation and accounting features that has been introduced in the European Union.
As a result of this legislation, with effect from January 1, 2021, reporting to HMRC under DAC 6 will now only include reporting under Category D of DAC 6, which contains hallmark D1 and D2. The change will apply to both historic, and future, cross-border arrangements. Hallmarks A, B, C and E have been repealed in UK law from January 1, 2021, with retroactive effect.
EU Council Directive 2011/16 (known as DAC 6) requires UK intermediaries (and in certain circumstances, taxpayers) to report, and HMRC to exchange with other EU Member State tax authorities, information regarding cross-border arrangements that contain one or more specified characteristics. Those characteristics are that a prescribed taxation or accounting "hallmark" is present in the arrangement, and that the arrangement in question concerns at least one EU Member State. Regulations implementing DAC 6 reporting obligations into UK law came into force on July 1, 2020, and were expected by tax professionals to continue despite the end of the United Kingdom's transition arrangements from the European Union (following Brexit) on December 31, 2020.
The changes to DAC 6 on December 31, 2020 therefore came as a surprise. The UK government's justification was that under the new post-Brexit agreement of the UK with the EU, the UK was committed to complying with OECD standards, but not EU standards. Accordingly, at the end of the Brexit transition period on December 31, 2020, the requirement on the United Kingdom to implement DAC 6 fell away.
The reduction of the scope of DAC 6 has been welcomed by the UK tax community. Many commentators had considered that the European Union's DAC 6 Directive was poorly drafted, with numerous ambiguities. DAC 6 also overlapped existing UK tax disclosure legislation in such a way that relatively few disclosures under the United Kingdom's DAC 6-enabling legislation were being triggered in practice, regardless of whether the same arrangements were also disclosable under EU Member States' DAC 6-enabling legislation.
Going forward in 2021, the scope of DAC 6 is now much reduced. Broadly, the remaining Hallmarks of DAC 6 under Category D apply to arrangements that use opaque structures to avoid the identification of ultimate beneficial ownership and/or undermine the Common Reporting Standard regarding offshore financial assets. As the DAC 6 rules in Category D broadly duplicate existing UK tax rules, it would be surprising if many disclosures were to be triggered for UK-based intermediaries, or UK-resident taxpayers, based on the Category D Hallmarks alone.
It should, however, be noted that intermediaries and taxpayers (including law firms, accounting firms and corporate service providers) operating in the European Union will still need to comply with DAC 6 under the particular EU Member State-enabled legislation to which they are subject. DAC 6 still applies in all EU Member States despite the changes in the UK referred to above.
HMRC have stated that in 2021, the UK government will consult on and implement the OECD's cross border disclosure regime, to replace DAC 6 and transition from European Union to international rules. The new regime is unlikely to be as onerous as the full breadth of DAC 6 would have been, as the regime should follow OECD models and not the EU Directive-led model of DAC 6. However, no precise details have been released by HMRC of what the new regime will consist of, or the practical aspects of the reporting regime itself.
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