DAC6 is an EU-driven policy that has now; despite Brexit, been adopted into UK law.
It requires that a separate report is made for certain cross border arrangements which involve a UK taxpayer that are deemed to have a tax motive. This is in addition to existing disclosure regimes (e.g. DOTAS, GAAR). While aimed primarily at aggressive tax avoidance, DAC6 is broadly drafted legislation and could mean that businesses with genuine commercial arrangements may be caught.
The regime places the primary reporting obligation on the “intermediary” rather than the taxpayer, i.e. if the reportable transaction has a “promoter” or “service provider” (e.g. a lawyer/accountant), it is their obligation to file the report and not the taxpayer’s.
The reporting window (once the transitional period ends ie from 1 January 2021) is only 30 days, and penalties are significant (starting at £5,000 with potential daily penalties thereafter).
What is reportable?
A cross border arrangement in this context is an arrangement between the UK and another EU state, or the UK/an EU state and a third territory. The arrangement is reportable if is it meets any one of a number of hallmarks, which can be broadly summarised as:
- Certain types of arrangement where the main benefit or one of the main benefits is the obtaining of a tax advantage. This does not need to be the intention of entering into the arrangement, but it is the outcome; Generally, these are things that look like “tax planning”.
- Certain types of arrangements which seek to avoid a disclosure requirement or to obscure beneficial ownership (even though this may not result in a tax advantage)
- Certain types of transfer pricing arrangement which are considered to be at odds with OECD transfer pricing guidelines (again, these may not result in a tax advantage), being:
- The use of “safe harbours”
- The transfer of hard-to-value intangibles where the basis of valuation is highly uncertain assumptions
- The transfer of functions/risks/assets which results in a 50% reduction in the transferor’s EBIT over the following three years (so this will catch certain genuine group reorganisations where businesses or shares are transferred cross border)
Note: there is an SME exemption for the transfer pricing “hallmark”.
The report itself is made via an online portal – while the amount of information required is not huge, it is likely to still require some data gathering by the reporting party.
Who is the arrangement reportable by?
If there is an intermediary for the arrangement, the primary reporting obligation falls on that intermediary. Where there is no intermediary, the obligation falls to the taxpayer. It is possible that in some scenarios, the arrangement will be reportable in more than one jurisdiction by more than one intermediary/taxpayer. Therefore there is a prescribed order of priority to avoid duplication of effort (as DAC6 has an inbuilt exchange of information between territories mechanism).
We expect that advisors may have a reporting obligation as a “promoter” or “service provider” in cases one or two above (note, lawyers may only claim limited legal and professional privilege as the content of any report is deemed to be largely factual vs advisory). In case three, where it is more likely such actions have been taken in-house, the reporting obligation is more likely to fall on the taxpayer.
What should I do if I think I have to make a report?
If you think you or your business may be caught because of tax planning arrangements you have participated in, or because of particular transactions you have undertaken, you will need to confirm whether the arrangements are reportable or not, and if so, who the reporting obligation falls to. A report will then need to be prepared and submitted to HMRC by the relevant filing deadline.
Our tax team is well placed to provide support with each of these elements. This post was written by Sarah Howarth, a tax specialist at Price Bailey. If you have any questions or would like to discuss DAC6 and what that means for you, you can contact Sarah using the form below.
We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.