Risk Update

Brexit Risk — Law Firm DAC6 Risk and Compliance Requirements Revised

Posted Dan Bressler

“2021 marks the beginning of the end of DAC6 in the UK” —

  • “The conclusion of the Brexit post-transition arrangements has brought an unexpected but welcome restriction to the application of the DAC6 rules that has largely repealed its reporting requirements in the UK.”
  • “In January 2020, 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” that could be used to avoid or evade tax. The DAC6 rules were particularly onerous as they required intermediaries to disclose relevant arrangements where the first step was taken on or after 25 June 2018 (the “look-back” period).”
  • “Fast-forward one year and, following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement, HMRC made an unheralded announcement on 31 December 2020 that reporting under DAC6 would only be required for arrangements that meet hallmarks under Category D. Category D broadly deals with undermining reporting obligations and obscuring beneficial ownership and shares substantial common ground with the Mandatory Disclosure Rules developed by the Organisation for Economic Co-operation and Development (OECD). Reporting requirements under Hallmarks A, B, C and E have been repealed. Regulations (SI 2020/1649) were made with effect from 31 December 2020 to implement this change and to ensure that the rules work correctly after the end of the transition period.”

“Important changes to DAC6 regime in the UK” —

  • “The UK has made important changes to its implementation of the EU Mandatory Tax Disclosure Rules known as DAC6. The changes, which significantly reduce the scope of the rules in the UK, are largely good news for UK taxpayers and their advisers. The effect is that DAC6 reports will be required more rarely from intermediaries or taxpayers in the UK. This applies both on an ongoing basis and to the ‘look-back’ period of reporting for arrangements where the first step of a reportable cross-border arrangement was between 25 June 2018 and 1 July 2020.”
  • “In the short term, however, there is likely to be some additional compliance burden in adapting existing DAC6 reporting processes for real estate transactions which also involve the EU. This is especially so given the last-minute and unexpected nature of the changes.”
  • “Professional advisers such as law firms and accountants, as well as others such as lenders and fund managers are all likely to qualify as intermediaries.”
  • “Many cross-border real estate transactions will therefore involve at least one cross-border arrangement. Where this is the case, the key ‘filter’ for DAC6 reporting will be whether one or more of the hallmarks are present. It is this aspect of the UK rules which has changed.”