Tax

On 30 November 2021, the U.K. government published a draft of new disclosable arrangements regulations, setting out the U.K.’s post-Brexit mandatory disclosure regime based on the framework established by the Organisation for Economic Co-operation and Development (the OECD) (the MDR Regulations). As we reported in December 2020, the scope of reporting in the U.K. under the existing regime established pursuant to EU Directive 2018/822 (DAC 6) – which requires disclosure of cross-border arrangements involving at least one EU member state and exhibiting certain specified hallmarks – was previously narrowed to the “category D” hallmarks, which generally include arrangements that undermine reporting requirements in relation to the automatic exchange of financial account information and arrangements that obscure beneficial ownership, with a view to aligning the U.K.’s reporting regime with OECD requirements. The new MDR Regulations will give effect to the OECD’s 2018 Model Mandatory Disclosure Rules (the Model Rules), and would replace the (significantly restricted) DAC 6 reporting obligations currently applicable in the U.K.

The MDR Regulations will, if enacted, require disclosure to HMRC of:

• CRS avoidance arrangements – arrangements where it is reasonable to conclude that the arrangement has been designed or marketed to circumvent (or has the effect of circumventing) the OECD’s global standard for automatic exchange of financial account information between tax authorities, known as the “Common Reporting Standard” (or CRS), including through the use of features similar to the specific indicators in hallmark D1 of DAC 6; and

• Arrangements using opaque offshore structures – passive offshore vehicles (legal entities without a substantive economic activity in the relevant jurisdiction) held through structures designed or marketed to obscure (or having the effect of obscuring) the determination of the natural person who beneficially owns the vehicle, similar to hallmark D2 of DAC 6.

Unlike DAC 6, the proposed MDR Regulations are not tied to EU jurisdictions and apply globally to relevant arrangements. As a result, no specific connection between the arrangement and the U.K. is required, although a report will be required in the U.K. based on the intermediary or taxpayer’s connection to the U.K.

The proposed reporting mechanics are similar to EU DAC 6. The obligation to make a report first falls on intermediaries (promoters and service providers, now as defined in the Model Rules), or on the reportable taxpayer if no intermediary exists or if the intermediary is unable to make a report. The information to be reported, including details of the relevant CRS avoidance arrangement or opaque offshore structure, is specified in the Model Rules, and an intermediary (or a taxpayer, as the case may be) is only required to report such information to the extent it is in that intermediary’s (or taxpayer’s) knowledge, possession or control. An exception for legal professional privilege is available to intermediaries. As is the case with DAC 6, individuals will not generally be treated as intermediaries where their employer (or an affiliate of their employer) is treated as such.

Also like DAC 6, the MDR Regulations include a “look-back period” which will require the reporting of certain arrangements entered into before the effective date of the MDR Regulations. A promoter of a reportable CRS avoidance arrangement must disclose any such arrangement implemented on or after 29 October 2014 (the date on which the CRS multilateral agreement was signed). Although this is a significantly longer look-back period than that which applied for DAC 6 purposes (extending to June 2018), the MDR Regulations incorporate a number of mitigating factors in that the look-back period applies only to promoters (not service providers or taxpayers) and only to CRS avoidance arrangements (not opaque offshore structures). Additionally, a report for the look-back period only needs to be made if the financial account subject to the CRS avoidance arrangement had a value of US$1m or more. Under the existing DAC 6 requirements, a participating U.K. intermediary – without regard to that intermediary’s classification as a promoter versus service provider – must disclose cross-border arrangements exhibiting either of the D1 (akin to CRS avoidance arrangements) or D2 (akin to opaque offshore structures) hallmarks and there is no applicable financial threshold for reporting; the mitigating factors will similarly not apply for reporting of relevant arrangements implemented following the commencement of the MDR Regulations.

The government expects the MDR Regulations to come into force in Summer 2022. If a report is required, this must (under the proposed drafting) be submitted within 180 days of the regulations’ commencement date for pre-existing reportable arrangements subject to the look-back provisions, and then within 30 days for all relevant arrangements implemented on or after the commencement date (calculated from the arrangement being made available, the intermediary providing advice or assistance or – where a taxpayer is required to report – the first step being implemented). Arrangements that have already been reported to HMRC under DAC 6 will not need to be reported again. Like DAC 6, financial penalties may be imposed for non-compliance, and the maintenance of procedures for identifying CRS avoidance arrangements and opaque offshore structures remains relevant to the issue of whether – and in what amount – penalties may be assessed.

HMRC has indicated that it will take a similar approach to that taken for DAC 6 in interpreting the new MDR Regulations. It is therefore anticipated that the existing HMRC guidance in the International Exchange of Information Manual will continue to apply, although HMRC also intends to publish further guidance once the MDR Regulations are finalised. HMRC has also described the OECD commentary on the Model Rules as a helpful source of interpretation, and has stated that the further HMRC guidance is expected to align with the OECD commentary.

Overall, and despite certain notable variations from the existing DAC 6 requirements, the MDR Regulations as currently drafted seem unlikely to have a significant impact on the number of arrangements that will be reportable in the U.K., save where they apply to promoters of CRS avoidance arrangements who may now need to consider whether arrangements stretching as far back as 2014 are reportable.

A consultation on the MDR Regulations is open until February 2022.