HMRC recently issued a further update on the new and onerous DAC6 disclosure requirements that are now in force for UK businesses and intermediaries. The most disappointing factor that has come out of it is that, despite it being apparent that businesses are still struggling to meet the unique demands placed on them by the COVID-19 pandemic, there has been no further delay in implementation. The deadline for reporting recent past transactions is fast approaching – 30th January and 28th February 2021.
What is DAC6?
DAC6 is an EU requirement for reporting by its member states on 'aggressive' tax planning and to increase scrutiny on tax advisers and tax planning teams (in-house or external). Our scheduled departure from the EU on 1 January 2021 will not affect this – the UK and HMRC are committed to continue with the implementation, despite still not being ready themselves by providing final guidance on the mechanics of the report.
The detail has already been provided but it can be summarised as saying it involves the reporting of certain tax planning arrangements by a UK person who engages in a transaction or series of transactions with an entity in another country (EU or otherwise). The planning must be within one of the ‘hallmarks’ – see below.
You need to report if:
- you are a UK resident person
- you have a permanent business in the UK and provide services that apply to the arrangement
- your business in incorporated or registered in the UK
- you are registered with a professional association for legal, taxation or consultancy services in the UK.
HMRC have stated in their update that this could include:
- loan agreements
- payments from a resident in one country to another
- putting funds in an offshore trust.
These are any of the following:
Hallmark A – confidential advice (use of confidentiality agreements; contingent fees based on tax success; standardised documentation not needing customisation)
Hallmark B - arrangements involving certain structured tax products – acquisition of losses; conversion of income into capital resulting in reduction of tax liability; circular transactions
Hallmark C – cross border transactions where income is not taxed as recipient is not resident; recipient is taxed at 1% or below; double deduction of depreciation / capital allowances; a material difference in tax treatment arises from a transfer of assets
Hallmark D – the arrangement obstructs automatic exchange of data; the recipient is in a ‘non-cooperative jurisdiction (per the OECD ‘black list’; recipient in a separate jurisdiction from the beneficial owner, has lack of substance there and remains unidentifiable.
Hallmark E – arrangements involving transfer pricing – use of safe harbours; transfers of ‘hard to value’ intangibles; intra-group transfer pricing arrangements where in the following 3 years EBIT is below 50% of the prior value.
It is likely that detailed scrutiny of many transactions will be necessary to consider whether they fit in the list and whether, in some of the cases above, a Main Benefits Test is applied objectively – i.e. whether the main purpose or one of the main purposes is the avoidance of tax
When do you report?
Going forward, reporting must be within 30 days of the earliest of:
- day after the arrangement is made available
- day after the arrangement started
- the day after you provided aid, assistance or advice in relation to the arrangement.
The bigger concern though is that there is catch up reporting to do which will cause difficulties for many businesses.
- arrangements between 1 July 2020 and 31 December 2020 must be reported by 30 January 2021
- arrangements between 25 June 2018 and 30 June 2020 to be reported by 28 February 2021.
Isn’t this someone else’s problem?
No arrangement needs to be reported twice and only one counterparty is needed to report for each arrangement and for all countries involved. This is primarily the responsibility of the tax adviser or promoter who was involved. They will receive an Arrangement Reference Number (ARN) which they are obliged to pass on to all other counter-parties in that arrangement.
The problem is that if the adviser isn’t diligent enough to report in a very tight timescale, then will the taxpayer feel confident that they have a reasonable excuse as to why they themselves have not reported? They also need to be satisfied that the third party intermediary or service provider has the bigger picture to be able to make an accurate report. There are differing reporting requirements depending on whether the third party is an intermediary or a service provider.
If a taxpayer receives all of the ARNs for all relevant cross border transactions, then they need take no further action, The ARNs are then provided in the tax return.
So, yes, it may be someone else’s problem but it could very easily default to be yours! Penalties are set at £5,000 plus £600 per day thereafter and can be up to £1 million. You need therefore to ensure you have dealt with this correctly!
UHY can assist in analysing your overseas transactions to consider whether any of the hallmarks apply and can also help to put together the reporting form where it is required. We can help to make this additional compliance burden to be as painless as possible.