DAC6 cancellation and replacement with OECD rules

05 January 2021

What has changed?

An unexpected consequence of the UK Government’s negotiations with the EU on a Free Trade Agreement was an abrupt about-face on most of the reporting obligations under DAC 6 for UK intermediaries and taxpayers. 

HMRC confirmed on 31 December 2020 (i.e. on the eve of the rules taking effect) that the UK would repeal the existing law on DAC 6 and replace it with rules implementing the less strict OECD rules on tax transparency. 

Businesses, including intermediaries such as accountancy firms, law firms, banks and trustees, will have decidedly mixed feelings about this.  

The obligations under DAC 6 created a large compliance burden for many businesses and the suspicion was that this would yield little additional data for tax authorities. The fact that this has been largely removed will be welcomed. 

However, the last minute nature of the change of policy has meant that many organisations will already have spent significant amounts of money and management time preparing for the new rules, including changes to internal reporting systems, training staff, and altering (or buying in) new IT software to enable them to comply. 

What are the OECD rules?

The OECD rules require reporting of arrangements designed to undermine tax reporting under the common reporting standard (CRS) and transparency rules, in particular:

  1. Arrangements which have the effect of undermining reporting requirements for the automatic exchange of information, and 
  2. Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no commercial substance. 

Where are we left now? 

UK businesses may still have reporting obligations requiring them to make reports from 31 January 2021 but the number of arrangements that are reportable will be far fewer:

  • The existing UK regulations are being amended to remove hallmarks A, B, C, and E. This will considerably reduce the number of arrangements that need to be reported to HMRC.
  • Hallmark D will remain in the regulations – this hallmark reflects the OECD rules above. 
  • Any reportable cross-border arrangements under hallmark D will need to be reported to HMRC along the lines previously envisaged. 
  • In due course, the existing regulations (based on DAC 6) will be replaced by new regulations implementing the OECD rules. This may not alter the thrust of the rules, but the details and process could differ.  
  • Existing domestic rules (such as the Disclosure of Tax Avoidance Schemes (DOTAS) regime) will continue to apply. 
  • We assume that HMRC will have no access to the DAC 6 data collected by other jurisdictions, although it is possible it may be able to obtain some of this information via existing agreements (e.g. under CRS). 

What should business do now?

Businesses that work internationally will still need to be aware of the DAC 6 requirements because these will affect their associated entities in EU territories. Groups that had organised themselves on the basis that UK intermediaries would make any relevant reports will now need to make further changes because any reporting obligations may instead fall on EU advisers or on the taxpayer entity itself. 

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