After Brexit, the UK makes significant unexpected changes to its DAC6 regime

10 February 2021
In 2018, the EU implemented a directive known as DAC6 in an effort to promote tax transparency.

The UK transposed DAC6 into national legislation in 2020. The law placed new obligations on relevant taxpayers and intermediaries, which include accountants, tax advisers, banks, lawyers and wealth managers , among others. The law required these parties to report details of cross-border arrangements that met potentially aggressive tax avoidance characteristics.

Due to the pandemic, the UK government extended some DAC6 reporting deadlines. However, intermediaries and relevant taxpayers were still obligated to comply with DAC6 or risk facing strict sanctions. 

In a surprising turn of events — and despite various governmental assurances to the contrary — the UK recently made legislative changes that significantly limit the scope of its DAC6 regime. The changes are effective from the end of the Brexit transition period on 31 December 2020. HMRC also announced that the UK plans to replace DAC6 with new legislation in 2021, formally adopting the OECD's Mandatory Disclosure Rules.

What the changes mean for UK intermediaries and taxpayers

Prior to these legislative changes, a cross-border arrangement could be reportable under a list of five indications, or “hallmarks,” of tax avoidance, lettered A through E.

Under the UK’s new rules, a cross-border arrangement will only be reportable in the UK if it meets Hallmark D. Hallmark D can be broadly divided into two categories:

  • Arrangements which have the effect of undermining reporting requirements under agreements for the automatic exchange of information; and
  • Arrangements which obscure beneficial ownership and involve the use of offshore entities and structures with no real substance.

In other words, a cross-border arrangement will no longer be reportable in the UK if it meets Hallmarks A, B, C and/or E and does not meet Hallmark D. Additionally, the main benefit test (used to establish if one of the main benefits of an arrangement is a tax advantage) applicable to Hallmarks A, B and some parts of C will no longer form part of the UK’s DAC6 regime. 

Effective date and reporting deadlines

The UK’s legislative changes will apply retrospectively to 25 June 2018. Under the new UK rules, intermediaries and their clients can only report to HMRC cross-border arrangements initiated since 25 June 2018 and falling within Hallmark D. 

The reporting deadlines remain the same. Here is a summary:

  • Hallmark D arrangements commenced on or after 1 July 2020 to 31 December 2020: By 30 January 2021
  • Hallmark D arrangements initiated on or after 25 June 2018 to 30 June 2020: By 28 February 2021
  • Hallmark D arrangements commenced from 1 January 2021: Within 30 days of the arrangement

Despite the reduced scope for reporting, UK intermediaries and taxpayers must remain vigilant when entering into future cross-border arrangements and closely consider Hallmark D's applicability. Vistra’s own UK offices, for example, must continue to monitor UK client entities' cross-border arrangements against Hallmark D where Vistra is an intermediary.

Other considerations

Although most UK intermediaries will welcome the reduction in reporting obligations, some practical issues may arise due to this legislative change. 

For example, EU intermediaries may be reluctant to rely on UK intermediaries' findings, which only consider whether Hallmark D applies. Remember that UK intermediaries will only need to report to HMRC under Hallmark D, while EU intermediaries must still consider the other hallmarks of DAC6. UK intermediaries may therefore find that in order to engage in meaningful cooperation with their EU counterparts, any discussion of DAC6 reporting will need to include consideration of all hallmarks, irrespective of any reduced UK-specific reporting requirements.

John Tay, Associate, Legal Advisor, Vistra Corporate Law, contributed to this article.