HMRC publishes consultation and draft regulations on new mandatory disclosure rules to replace DAC6

Following the Autumn Budget on 27 October 2021, the UK government published a further set of tax policy documents on 30 November as part of its Tax Administration and Maintenance Day. One of these documents included the long-awaited consultation on the implementation of the OECD's model mandatory disclosure rules for Common Reporting Standard (CRS) Avoidance Arrangements and Opaque Offshore Structures (known as the Model Rules) which has been promised since the beginning of 2021. 

Disclosure rules under DAC6

The UK implemented the EU directive known as DAC6, which came into force on 1 July 2020 and required "intermediaries" (including law firms, accountants and tax advisors) to report to HMRC (from 1 January 2021) cross-border arrangements that met one of a number of "hallmarks" (in Categories A to D) that could be used to avoid or evade tax. The DAC6 rules required intermediaries to disclose relevant arrangements where the first step was taken on or after 25 June 2018 (the "look-back" period).

We highlighted in our Insight in January this year that the conclusion of the Brexit post-transition arrangements had brought an unexpected but welcome restriction to the application of the DAC6 rules in the UK that limited reporting under DAC6 to arrangements that met hallmarks under Category D. Category D deals with undermining reporting obligations including under the CRS (hallmark D1) and obscuring beneficial ownership (hallmark D2) and shares substantial common ground with the Model Rules. 

Alongside the narrowing of the disclosure rules under UK DAC6, HMRC said that it would consult on and implement the Model Rules as soon as practicable, to replace DAC6.

Consultation on UK mandatory disclosure rules

On 30 November 2021 HMRC published draft regulations and a consultation on the new UK mandatory disclosure rules (MDR). The draft regulations draw closely on the Model Rules, to provide consistency in the application of the rules between jurisdictions. Once the new rules are implemented (which is expected in summer 2022) the UK MDR will replace DAC6, which will be repealed.

UK MDR will require "intermediaries" who include "promoters" (those who design or market the arrangement), "service providers" (broadly those who assist or aid the implementation of the arrangement) and (sometimes) taxpayers to send information to HMRC about arrangements and structures that are designed to facilitate non-compliance through the use of "CRS avoidance arrangements" and "opaque offshore structures". 

CRS avoidance arrangements are defined in rule 1.1 of the Model Rules. This definition captures any arrangement “for which it is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS Legislation or exploiting an absence thereof” and includes a non-exclusive list of examples. 

An opaque offshore structure is defined in rule 1.2 of the Model Rules as being a passive offshore vehicle held through an opaque structure and covers much of the same ground as hallmark D2 in the DAC6 rules (obscuring beneficial ownership). 

Given the similarities between UK MDR and DAC6, HMRC proposes to take a similar approach to the interpretation of UK MDR as it took for DAC6. HMRC intends to publish guidance on UK MDR once the regulations are finalised and before the rules comes into effect, but it envisages that generally the guidance will be consistent with existing guidance currently in its International Exchange of Information Manual. HMRC will, however, make changes that are necessary to ensure alignment with the Model Rules and commentary, or to address any gaps in the existing guidance.

Lookback period for UK MDR

The consultation proposes, as was the case with DAC6, a "look-back period" which would require the reporting of certain pre-existing arrangements. However, the look-back period under UK MDR would stretch to arrangements entered into since 29 October 2014 (to catch arrangements which were put in place following the publication of the CRS but before reporting under the Model Rules came into force in 2018). 

HMRC appreciates, however, that this will place a big compliance burden on intermediaries and taxpayers to review historic arrangements to determine if any are reportable under UK MDR and so it proposes to implement a number of limitations to this requirement. The proposed limitations are: 

1. The regulations will only require reporting of "CRS avoidance arrangements", and not "opaque offshore structures".
2. The reporting requirement will only apply to "promoters" and not to "service providers" or taxpayers (so this should exclude many law firms unless they were also the promoters of the arrangements).
3. The reporting requirement will only be engaged where the value of the financial account that is subject to the CRS avoidance arrangement immediately prior to the implementation of the arrangement was more than US  $1,000,000 (or sterling equivalent). 
4. An arrangement which has been disclosed to HMRC under DAC6 does not have to be disclosed again under the UK MDR regulation.

HMRC has said that it welcomes feedback on the lookback period as to whether it has struck the right balance between minimising burdens on business and ensuring the UK MDR regime operates effectively. 

Wider territorial scope

The DAC6 rules applied to arrangements which "concern" the UK and any other jurisdiction (or which concern two or more EU member states, or an EU member state and any other jurisdiction). 

The draft UK MDR regulations, in line with the approach in the Model Rules, do not include any such territorial limitations and so arrangements and structures will be reportable regardless of which jurisdictions they involve, as long as the intermediary or taxpayer has a reporting obligation in the UK. This will be met if the intermediary or taxpayer has a UK nexus (for example it is resident or incorporated in the UK or has its place of management in the UK).

Reporting exemptions

There are certain proposed exemptions from reporting under UK MDR, including an exemption for intermediaries if disclosing the information in question would breach legal professional privilege (LPP). Where LPP applies, it is proposed that the lawyer must notify their client in writing of the client’s disclosure obligations. There was a similar exemption in DAC6, however under DAC6 it was sufficient to notify another intermediary (or the taxpayer) that LPP applied to the arrangement (so that reporting would then fall on the other intermediary or the client). 

HMRC has confirmed that this change to the LPP exemption has been proposed to align the regulations with the Model Rules (which refer to the "client" reporting) but that it welcomes feedback to ensure the regulations work as intended. 

Another exemption from reporting will apply where information on the arrangement has already been provided to a tax authority in a "partner jurisdiction". A partner jurisdiction is defined in the Model Rules as being a jurisdiction that has introduced substantially similar reporting rules and has the necessary exchange of information agreements in place to ensure that information will be shared between the appropriate tax authorities. It is expected that a list of partner jurisdictions will be included in the new UK MDR regulations for clarity.  

Osborne Clarke comment

Businesses will be relieved that the consultation and draft regulations on UK MDR have finally been published so that they have time to prepare for its implementation in summer 2022. 

Although the scope of arrangements which are expected to be reportable under UK MDR are broadly similar to those already reportable under DAC6, intermediaries will still need to consider whether they have any arrangements which are within the scope of the new reporting rules. Promoters, in particular, will need to undertake a further look-back exercise in relation to arrangements put in place since 29 October 2014 to see if any others (which have not been reported under DAC6) are reportable under UK MDR.  

While HMRC is trying to maximise alignment with the Model Rules to maintain consistency between implementing jurisdictions (and so reducing the reporting burden faced by businesses operating across multiple jurisdictions), there are still some issues to be worked through – in particular the issue around privilege. 

We would urge businesses who may be in scope of the new rules to submit representations to HMRC as part of the consultation process by 8 February 2022 when the consultation will close.

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