DAC 6: tax evasion and avoidance across borders

Access GroupBy Legal Futures’ Associate The Access Group

DAC 6 comes into force in the UK on 1 July 2020. It will impose a reporting obligation that will require many law firms, particularly those advising on matters that are international in scope, to report to HMRC about some of their matters. Law firms affected by this reporting obligation will need to start preparing for it as soon as possible in order to be ready to comply by 1 July.

On 1 July 2020, the International Tax Enforcement (Disclosable Arrangements) Regulations 2019 (the “Regulations”) will take effect in the UK, implementing the 6th amendment of the Directive on Administrative Cooperation in the field of taxation, otherwise known as DAC 6.

DAC 6 aims to provide EU state regulators with more transparency over ways in which cross-border arrangements are used to avoid and evade taxes so they can counteract this erosion of their tax bases.

DAC6 imposes a broad reporting obligation on intermediaries who design or market cross-border arrangements containing specific “hallmarks” or characteristics that are commonly found in attempts at tax avoidance and evasion and intermediaries who provide aid, assistance or advice on such arrangements.

Law firms affected by DAC 6 will generally fall into the second category of intermediaries. Firms in the UK providing any aid, assistance or advice on reportable cross-border arrangements will need to submit reports about these arrangements to HMRC.

Final Regulations and Consultation Responses

On 13 January, HMRC published the final Regulations. A number of concerns and queries that were raised in consultation responses were addressed by HMRC through amendments to draft Regulations released last July. These include:

  • HMRC partially addressed concerns from lawyers about maintaining legal professional privilege while complying with Regulations. In the final Regulations, an intermediary withholding privileged information is not obligated to inform another intermediary or the taxpayer of their duties to report that information if doing so would breach LPP.
  • The penalties for non-compliance were generally reduced. The default penalty is now a one-time fine of up to £5,000. A further penalty of up to £600 a day can be imposed if HMRC deems the one-time penalty to be to low based on considerations such as whether the failure to comply was deliberate and the measures that were implemented to comply with the Regulations. In extreme cases, a penalty of up to £1 million can be imposed.
  • The territorial scope of the Regulations has been narrowed such that they only apply to intermediaries and taxpayers with a connection to the UK.

Forthcoming guidance and uncertainty

HMRC plans on releasing guidance on the Regulations before 1 July. This is frustrating for those affected by the Regulations given that HMRC has deliberately chosen to address most of the consultation concerns and queries in the guidance. Indeed, HMRC has identified over a dozen key issues regarding the Regulations that it says will be covered in the guidance. Many of these issue will be of particular interest to law firms, such as how the privilege rules will operate, issues related to the fact that both an LLP and its individual partners can qualify as intermediaries, and the due diligence that intermediaries must undertake to determine whether they are aiding or advising on a reportable arrangement.

Unfortunately, firms that advise on matters that will trigger the reporting obligation cannot afford to wait for HMRC’s guidance before they start preparing for the Regulations. Firms now have less than five months to implement measures necessary for compliance, such as a procedure to identify reportable matters during the new matter inception process and a system for creating and submitting reports to HMRC. If that wasn’t enough, there is also DAC 6’s 31 August deadline for retroactive reporting. By that date, firms must determine whether any of the matters they worked on between 25 June 2018 and 1 July 2020 trigger the reporting obligation and report to HMRC accordingly.

It is important to note that most firms will not be affected by DAC 6. So, the first step to compliance for every firm should be to determine whether that firm is likely to work on matters that will trigger the reporting obligation (and whether it has worked on any such matters since 25 June 2018). Only firms that answer “yes” need to implement compliance measures such as those mentioned above.

How the Access Group can help

Our DAC 6 Introduction course is designed to help COLPs and senior compliance staff by providing an overview of DAC 6 and the reporting obligation.  The course includes a flowchart to help them decide whether or not their firms will be affected by DAC 6.  The DAC6 course will form part of our eLearning – Governance, Risk and Compliance catalogue.

Download The Access Group’s complete legal training collection


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