DAC 6: What tax advisers need to know
Neil Insull explains how you can determine which cross-border arrangements are covered by DAC 6, and what details you should report to HMRC.
In my first DAC 6 article, I focused on why UK companies, and certain other taxpayers, should pay close attention to the DAC 6 rules. In most cases the company’s tax adviser will have the primary reporting responsibility, so you need to understand these rules.
What is a cross-border arrangement?
This is an arrangement in which a UK taxpayer participates with another party who is tax resident in a country other than the UK, whether or not that other person is in or outside the EU.
Which arrangements are reportable?
A cross-border arrangement is only reportable if the arrangement displays a ‘hallmark’. There are five categories of hallmark (A to E) and subcategories within each. All are perceived by the EU to be hallmarks of aggressive tax planning arrangements, but not all of them require there to be a motive to avoid tax in order to be reported.
These are the categories:
A: Generic tax avoidance
One of the main benefits of the arrangement must be tax avoidance, and there are features commonly seen in marketed tax avoidance schemes such as:
- Confidentiality clauses that prevent disclosure of how the tax advantage is secured
- Fees geared to tax savings
- Standardised documents and structures.
HMRC may take a very wide view of the last point, but general commercial use of standardised documents (especially if they are customised) should escape reporting.
B: Specific tax avoidance
These arrangements must also have a motive of tax avoidance and fall into one of:
- Sale of a loss-making company
- Converting income into capital
- Circular transactions resulting in round-tripping of funds.
In each case, only contrived tax planning arrangements are relevant, the results of which are inconsistent with the underlying intent of the legislation.
C: Cross-border transactions
A payment between a UK company and an overseas ‘associated company’ could be caught under category C if one of the following applies:
- the receipt is not taxed or subject to a preferential tax regime
- it results in a deduction of capital allowances in the UK and tax relief for the associated company
- double taxation relief in both companies
- an asset is transferred to exploit a ‘material’ mismatch between the tax treatment of the payment and the receipt.
Other than some payments falling under 1), the absence of a tax motive is not relevant to this category. It is quite possible that completely commercial and inoffensive transactions will be reportable.
HMRC has offered limited guidance and only one example so far, suggesting that tax exemption on the sale of a company’s shares in the UK should not be considered ‘material’.
D: Automatic exchange of information and beneficial ownership
There are two sub-categories:
- Any arrangement which seeks to undermine reporting obligations under the Common Reporting Standard (CRS), and therefore prevents the proper exchange of information between tax authorities.
- Any arrangement involving non-transparent ownership chains to obscure beneficial ownership. This will include use of offshore nominee shareholdings or the use of jurisdictions which allow beneficial ownership to remain hidden.
E: Concerning transfer pricing
Small and medium enterprises, which are exempt from the UK transfer pricing rules, are not required to report any arrangements under category E.
For large companies, a transaction is reportable if one or more of the following applies:
- it uses a transfer pricing safe harbour rule
- the transfer is of a ‘hard-to-value’ intangible (HTVI)
- it is the transfer of functions, risks, or assets, and the transfer results in at least a 50% reduction in the projected EBIT in the following three years
The absence of a tax motive is irrelevant for all three.
Point 2) occurs where there is no reliable comparable available, and the projections of cash flow and income are so uncertain it is difficult to predict the intangible’s ultimate success. HTVI is a recognised transfer pricing term, considered a high-risk area by tax authorities, and will include intangibles that are only partially developed, or are years from being commercially exploited.
Point 3) has similarities with category C, but is likely to catch many very straightforward and commercially driven intragroup transfers. Transfers of businesses and shares and other group reorganisations could easily satisfy the 50% reduction of earnings test and would immediately be reportable.
What details must be reported to HMRC?
Information reported under the 30-day rolling reporting deadline will be sent to HMRC through an online portal. This isn’t open yet and we don’t know exactly how it will work but we do know the reports will need to include:
- identification of intermediaries and relevant taxpayers and associated companies (if appropriate)
- details of the hallmark
- summary of the arrangement
- date of the first step of implementation
- value of the arrangement
- identification of the EU member state of the relevant taxpayer, and any other EU member state concerned or persons affected by the arrangement
Although the primary obligation of reporting under DAC 6 will fall on advisers, taxpayers will need to recognise the occasions where the obligation falls back on them.
Taxpayers should also understand that the disclosure exercise will probably include unexceptional, commercial group transactions with no tax avoidance motive involved. I can understand categories A, B and D being at the centre of the EU’s radar on tracking tax avoidance (particularly with individuals), but categories C and E can be argued to invite fishing expeditions by tax authorities into the commercial activities of taxpayers with very little cause.
Delay to reporting
In my first article, I reported the European Commission proposal to delay to start the 30-day DAC 6 reporting by three months. However, HMRC has now confirmed that commencement of reporting under DAC6 in the UK has been deferred by six months, meaning the first deadline is now 1 January 2021, rather than 1 July 2020.
HMRC has also updated its guidance on the new regime in the International Exchange of Information Manual, which gives details of the new reporting deadlines at IEIM800010.
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I joined Blick Rothenberg in September 2019 as a Corporate Tax partner after eight years with Rawlinson & Hunter. I have been advising on business tax for 30 years and specialise in providing tax advice to owner managed businesses.