KEY POINTS

  • The UK Regulations, finalised on 13 January 2020, will only apply in relation to direct EU taxes.
  • The Legal Professional Privilege exemption is still unclear.
  • Penalties have been capped at £5,000.
  • Guidance from Her Majesty's Revenue and Customs (HMRC) to follow.

In December, Katten provided analysis on DAC, the draft UK Regulations implementing the new reporting requirements relating to certain cross border arrangements, in an advisory, "New EU wide tax anti-avoidance law introducing sweeping disclosure requirements". In this follow up note, Katten examines the key updates since the UK Regulations1 were finalised on 13 January 2020.

Recap

The 2018 EU DAC6 Directive2 (DAC6) amended the 2011 Directive on administrative cooperation in the field of taxation3 (DAC) to introduce a mandatory EU-wide regime requiring intermediaries in cross-border arrangements to make a disclosure to their relevant tax authority, where the arrangement meets certain hallmarks that suggest a potential risk of tax avoidance. The UK Regulations will come into force on 1 July 2020 but will impose a reporting requirement in respect of affected arrangements implemented on or after 25 June 2018.

The changes

Inclusion of 'UK' intermediaries and 'UK relevant' taxpayers

The UK Regulations now make it clear that only intermediaries and taxpayers who are "UK intermediaries" or "UK relevant taxpayers" need report in the UK.

In addition to being an 'intermediary', as defined under DAC6, a 'UK intermediary' is someone who is:

  • resident in the UK for tax purposes;
  • has a permanent establishment in the UK through which the services with respect to the arrangement are provided;
  • incorporated in, or governed by the laws of the UK; or
  • is registered with a professional association related to legal, taxation or consultancy services in the UK.

Under DAC6 a secondary reporting liability falls on 'taxpayers' — however, under the UK Regulations the secondary liability now falls only on 'UK relevant taxpayers'. This is someone who:

  • is resident in the UK for tax purposes;
  • has a permanent establishment in the UK benefiting from the arrangement;
  • receives income or generates profits through the UK, despite not being UK resident for tax purposes and having no UK permanent establishment; or
  • carries on an activity in the UK, despite not being resident in the UK for tax purposes and having no UK permanent establishment.

The various categories of intermediary and taxpayer form a waterfall — if an intermediary or taxpayer potentially has reporting requirements in more than one EU member state, then the intermediary or taxpayer does not have to report in the UK if it falls into a category higher up the waterfall in another jurisdiction. So an intermediary resident in France but with a UK permanent establishment would report in France not the UK.

Applicable taxes

The draft UK Regulations extended the DAC meaning of 'taxes' to include non-EU taxes, such as US taxes. The finalised UK Regulations have dropped this widened meaning, with 'taxes' now relating only to taxes as defined under DAC. The UK Regulations therefore do not apply to value-added tax (VAT), customs duties, excise duties or other indirect taxes, or any non-EU taxes, direct or indirect.

Annual reports made by UK relevant taxpayers

UK relevant taxpayers must make their first annual report in the tax year or accounting period in which the first of the following occurs:

  • the disclosable arrangement in question is made available for implementation to the taxpayer;
  • the disclosable arrangement is ready for implementation by the taxpayer; or
  • the first step in implementation of the disclosable arrangement is made in relation to the taxpayer.

UK relevant taxpayers are required to make a report in each subsequent tax year or accounting period in which their participation secures a tax advantage, rather than every year the taxpayer participates in the arrangement (as was the case under the draft UK Regulations). The report must set out the tax advantage of the arrangement for that year, rather than the effect of the arrangement on the taxpayer's affairs.

Legal Professional Privilege

In HMRC's response to the consultation on the draft UK Regulations, HMRC agreed that the rules as initially drafted could cause difficulties in ensuring that Legal Professional Privilege (LPP) was not breached. The finalised UK Regulations have been amended to ensure that nothing in the UK Regulations requires a UK intermediary to disclose any privileged information. However, the amendment does not explain how LPP will interact with the UK Regulations or provide guidance as to how the exemption will apply in practice. HMRC have confirmed4 that they will provide guidance on how the rules will operate in practice.

Penalties

The biggest changes made under the finalised UK Regulations are in relation to the penalties for non-compliance. An initial failure to comply with the UK Regulations can now usually result only in a penalty not exceeding £5,000.

However, where a failure relates to the following obligations:

  • a UK intermediary or UK relevant taxpayer's obligation to make a return of reportable information;
  • a UK intermediary's obligation to notify other intermediaries/tax payers where the UK intermediary can claim that the legal professional privilege exclusion applies; or
  • the requirement to provide information,

then if HMRC consider a penalty of £5,000 to be inappropriately low intermediaries and relevant taxpayers could be liable for an alternative penalty of up to £600 a day until the non-compliance is remedied. If HMRC still consider the penalty to be too low, the penalty can be raised to a figure that appears appropriate — this can be up to £1 million.

Finally, if the failure continues after the initial penalty is imposed, a further penalty not exceeding £600 for each day on which the failure continues also will be imposed.

Penalties for UK taxpayers who fail to comply with their annual reporting obligation remain the same as noted in Katten's "New EU wide tax anti-avoidance law introducing sweeping disclosure requirements" advisory.

Final comment

Despite the finalised UK Regulations having been published, how they will work in practice is still unclear. HMRC have advised that guidance will be provided, including examples of what will and will not be considered to be reportable cross-border arrangements under the UK Regulations. Until then, the practicalities of compliance, such as whether an arrangement is reportable and if so when it must be reported and what aspects of the arrangement will be protected by LPP, remain uncertain.


1 THE INTERNATIONAL TAX ENFORCEMENT (DISCLOSABLE ARRANGEMENTS) REGULATIONS 2020, SI 2020/25.


2 COUNCIL DIRECTIVE (EU) 2018/822.


3 COUNCIL DIRECTIVE (EU) 2011/16.


4 HMRC's INTERNATIONAL TAX ENFORCEMENT: DISCLOSABLE ARRANGEMENTS — SUMMARY OF RESPONSES.