The rule of DAC6 - are you ready?
UK companies involved in cross-border transactions need to be aware of looming reporting deadlines imposed by EU law and now implemented in the UK . These rules are designed to facilitate the reporting and sharing between EU tax authorities of instances of tax planning. However, the types of transactions caught by these rules are not limited to aggressive tax planning arrangements. In a number of cases, it is not a requirement for there to be a tax motive for the transaction to be reportable.
This blog considers how 'DAC6' might affect UK companies.
A common misconception about DAC6 is that it only concerns "intermediaries" (law firms, accountants and other professional services providers). Responsibility for assessing, and reporting, transactions under DAC6 shifts to the UK company taxpayer in certain cases. It should therefore not be assumed that DAC6 affects only professional services firms and other advisors.
It will be important for UK companies entering into cross-border arrangements to be aware of the rules and how they operate, given the reporting deadlines under DAC6 which are due to fall in early 2021. Significant penalties can be imposed for failures to report under DAC6 when required to do so.
How does DAC6 work?
The primary focus of DAC6 and the Regulations is to require "intermediaries" to review, monitor and, potentially, to report to HMRC certain arrangements which both (1) are "cross-border" in nature and (2) meet certain specified "hallmarks".
The first step, therefore, is to determine whether a transaction or other arrangement is "cross-border". For DAC6 purposes this means involving more than one EU member state, or an EU member state and a non-EU jurisdiction. The UK is considered a member state for these purposes, at least until the end of the Brexit transition period . In many cases whether or not an arrangement is cross-border should, hopefully, be obvious. However there is, currently, some ongoing debate / uncertainty in some cases as to whether an arrangement truly involves a particular jurisdiction.
Once it has been determined that a particular arrangement is "cross-border", the next step is to consider whether any of the 15 DAC6 hallmarks apply to that arrangement. The hallmarks range from those one might typically expect to find in tax motivated 'schemes' (such as fees being dependent upon a tax advantage being delivered) to certain cross-border transfers of assets with no tax avoidance motives.
The legislation is intended to identify potential tax-planning schemes. However, as noted above arrangements without a tax avoidance motive can also be caught as not all of the hallmarks include the requirement that obtaining a tax advantage might reasonably be expected to be a main benefit of the arrangements
What are the deadlines for reporting under DAC6?
As noted above, DAC6 has already been implemented in the UK. It also has retrospective effect, in the sense that arrangements entered into from 25 June 2018 are potentially subject to review and to reporting.
However, the first deadlines for reporting reportable cross-border arrangements have not yet passed. Initially set for first reporting by 31 July 2020, the various deadlines have been pushed back in the UK as a result of COVID-19 so that, at the time of writing:
- arrangements where the first step was implemented between 25 June 2018 and 30 June 2020 must be reported to HMRC by 28 February 2021
- arrangements which trigger a reporting requirement between 1 July 2020 and 31 December 2020 must be reported to HMRC by 31 January 2021
- arrangements which become reportable on or after 1 January 2021 must be reported within 30 days of the reporting requirement being triggered
- where periodic reports are required in relation to marketable arrangements, the first such report must be made by 30 April 2021
What does all this mean for UK companies?
The primary burden of DAC6, in terms of determining whether any cross-border arrangement needs to be reported, and then actually making any report, falls on the "intermediary" (for example, the relevant law firm, accountancy firm or other professional advisor).
This does not mean that any UK company that is not an "intermediary" should ignore DAC6. Here are some reasons why:
- one would expect that a company would want to at least know what transactions are being reported to HMRC by an "intermediary" that it has engaged. The terms of engagement for a number of intermediaries now include language recognising that the intermediary may have reporting requirements under DAC6. The company might reasonably expect to see a draft of any such report before it is made.
- if (1) there is no UK "intermediary" involved, or (2) where a UK law firm, as the only "intermediary", is prevented from itself making a DAC6 report to HMRC due to legal professional privilege (LPP), in either case it may fall on the UK company taxpayer (for example the law firm's client) to make any required report. In the case of such an intermediary prevented from reporting due to LPP, that intermediary would be required to notify the client of its obligations under DAC6.
- in terms of M&A, we are starting to see buyers of UK companies include a warranty that extends to DAC6 reporting requirements. Such a warranty typically includes a statement that the target company has not entered into any arrangements that would be reportable under DAC6. Even with published guidance that HMRC state to be 'final', there are still some significant uncertainties as to whether certain types of cross-border transactions are caught by DAC6. Agreeing to such a warranty may therefore be challenging for certain companies.