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UK unexpectedly reduces tax scheme reporting burden on firms

Brexit: Surprise u-turn

The government has unexpectedly announced that DAC 6, an EU cross-border tax transparency rule with major implications for international law firms, will be rewritten in the wake of the pre-Christmas Brexit trade deal.

DAC 6 requires any intermediaries to a tax arrangement that meets certain criteria, including law firms, to report that arrangement to the local tax authority.

The reporting obligation came into effect on 1 July 2020 and firms had until the end of this month to report any arrangements thereafter. For transactions on or before 30 June 2020 where the first step in implementation was taken on or after 25 June 2018, the deadline was 28 February 2021.

The UK government had indicated that DAC 6’s implementation would be unaffected by the end of the Brexit transition period.

But as law firm Gibson Dunn explained in a briefing [1], under the free trade agreement between the UK and the EU, the UK is only required to ensure any legislation it implements at the end of the transition period relating to the exchange of information concerning potential cross-border tax planning arrangements offers the level of protection provided for by the “standards and rules which have been agreed in the OECD”.

As a result, the UK government published legislation on New Year’s Eve to narrow the scope of the regulations on a temporary basis ahead of a consultation on legislation to implement mandatory reporting under the OECD Mandatory Disclosure Rules.

Only cross-border arrangements that fall within category D of part II of DAC 6 will fall within the scope of UK reporting obligations.

Gibson Dunn said this covered arrangements that either have the effect of undermining reporting obligations under agreements for the automatic exchange of information (such as the EU Common Reporting System, or the OECD’s Common Reporting Standards), or involve non-transparent legal or beneficial ownership chains.

“Nevertheless, a full DAC 6 assessment and hallmark analysis will still be required in respect of EU jurisdictions involved in a transaction, in order to determine whether a DAC 6 filing obligation arises in those member states.”

Yehuda Solomont, chief marketing officer at compliance specialists VinciWorks, said “nearly every matter” a firm dealt with could have been touched by DAC 6.

He said the impact was “in the same vein to how the money laundering regulations changed the entire way that law firms approached things”.

Mr Solomont said: “There are more questions than answers on what is happening at the moment and there is a lot of confusion.

“Pundits have different opinions on the future. The UK likes to be at the forefront of tax evasion, so it’s likely that the UK’s version of DAC 6 will be on a par with it or more aggressive.”

Meanwhile the Solicitors Regulation Authority (SRA) has told law firms that they have until this Sunday (10 January) to check whether tax advice they offer falls within the scope of last year’s Anti-Money Laundering Directive [2].

The SRA said the directive widened the definition of ‘tax adviser’ to include “more activities than before” and any firm that is in scope needs to apply to the SRA, or another anti-money laundering supervisor such as HMRC, to be supervised.

The regulator has produced guidance for law firms [3] on tax advice to help them determine whether or not they fall within the scope of the regulations.

Paul Philip, chief executive of the SRA, said the wider definition of tax adviser meant that firms not currently engaged by the anti-money laundering regulations would now be included.

“Any firm providing tax adviser services must check the position and, if necessary, apply to us or another AML supervisor. Alternatively, you might choose to drop the activities that bring you into scope.

“Whatever you choose to do, you need to have made that decision and acted accordingly before 10 January.”