The International Tax (Enforcement Arrangements) Regulations 2020 came into force on 1 July 2020. These regulations implement EU Directive 2018/822 (DAC6), introducing new obligations on taxpayers and their advisers to make a report to HMRC when certain cross border arrangements are implemented.
The rules, which are likely to continue to apply despite Brexit, are very wide in scope and potentially apply to standard arrangements with no particular tax motive. Additionally, the reporting obligation covers arrangements going back to June 2018, long before there was any detailed guidance. There could be significant financial and reputational consequences if arrangements caught by the regulations are not reported within 30 days of the relevant trigger event.
What arrangements must be reported?
HMRC’s final guidance is contained in its International Exchange of Information Manual at IEIM600000. Reporting to HMRC will be required where a “cross border arrangement” falling within certain “hallmarks” is implemented by a UK intermediary or taxpayer. A cross border arrangement is an arrangement involving more than one EU Member State or an EU Member State and a third country where one of a number of conditions are met, for example where the parties are resident in different tax jurisdictions.
The cross border arrangement must fall within one of hallmarks A to E. These are categories of transactions that give an indication of a potential risk of tax avoidance although there is no requirement for a tax avoidance motive. The scope of the hallmarks is one of the key areas of ambiguity in the regulations. HMRC gives helpful guidance and examples in many cases, but there are still many unanswered questions relating to the type of transactions that will be caught.
What is the main benefit test?
Some of the hallmarks are subject to a “main benefit test”. This means that the arrangement will only be reportable if the main benefit or one of the main benefits which a person may reasonably expect to derive from the arrangement is the obtaining of a tax advantage. The regulations clarify that there will only be a “tax advantage” where obtaining it cannot reasonably be regarded as consistent with the relevant principles and policy objectives of the relevant legislation. The guidance states that it is an objective test and determining whether the tax advantage is a “main benefit” will involve a consideration of the value of the expected tax advantage compared to the value of any other benefits likely to be enjoyed.
The diagram below summarises the hallmarks and when the main benefit test will need to be met.
Who is required to report?
The reporting obligation lies with a UK “intermediary”. There are two types of intermediary: “promoters”, who design, market, organise, implement or make available an arrangement; and “service providers”, who assist or advise in relation to the arrangement. The definition of intermediary will therefore usually cover advisers such as lawyers, tax advisers and accountants. A promoter will almost invariably have a full understanding of the material aspects of the arrangement. A person will only be a service provider if they knew or could reasonably be expected to know that they were providing assistance in relation to a reportable cross-border arrangement.
The obligation to report to HMRC will shift to a UK “relevant taxpayer” where there is no intermediary or where legal professional privilege applies and is not waived.
What are the deadlines?
The UK deferred the original reporting deadlines by 6 months due to the coronavirus pandemic. There is a 30-day reporting deadline for arrangements with a reporting trigger on or after 1 January 2021. A report must be made within 30 days of the earliest of the following:
- the day after the arrangement is made available for implementation
- the day after the arrangement is ready for implementation
- the first step in implementing the arrangement is made
- if a person is a “service provider” the day after they gave the relevant aid, assistance or advice.
There are specific deadlines for historical cases. Reportable arrangements where the first step in the implementation took place between 25 June 2018 and 30 June 2020 must be reported by 28 February 2021. Arrangements with a reporting trigger between 1 July and 31 December 2020 must be reported within the period of 30 days beginning on 1 January 2021.
What should be done now?
Intermediaries should be reviewing historical matters to identify any reportable cases and ascertain who has the obligation to report. There will also need to be processes in place to identify, monitor and record all future reportable cross-border arrangements.
Failure to comply can result in penalties, with a default one-off penalty of no more than £5,000 and higher penalties in exceptional circumstances. Having robust procedures in place to enable appropriate reporting may mitigate any penalty for errors.
A monthly briefing from Irwin Mitchell
October 2020
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