Mandatory Disclosure Rules: UK Government Publishes Consultation Response

On 24 November 2022, the UK government published a much anticipated response to its consultation on the implementation of the Organisation for Economic Cooperation and Development’s (OECD) model Mandatory Disclosure Rules (MDR), which had been published (together with draft regulations) on 30 November 2021. As noted in Weil’s previous MDR / DAC 6 Update (accessible here), the draft MDR regulations were originally intended to be implemented in Summer 2022; the consultation response now specifies that revised regulations will take effect in the first half of 2023, at which point the UK regulations implementing DAC 6 in the UK will be simultaneously repealed. Once the MDR regulations come into force (the Effective Date), pre-existing reportable arrangements falling within the designated look-back period (see further below) must be reported within 180 days of the Effective Date and reportable arrangements implemented on or after the Effective Date must be reported within 30 days of their implementation.   

The MDR regulations require “promoters”, service providers and, in some cases, taxpayers, to disclose to HMRC information regarding: (i) arrangements which circumvent the OECD’s global standard for automatic exchange of financial account information between tax authorities, known as the “Common Reporting Standard” (or CRS); and (ii) arrangements using opaque offshore structures which have the effect of obscuring beneficial ownership. These arrangements generally align with the so-called “Category D” hallmarks under DAC 6, which remain the only notifiable hallmarks under existing UK DAC 6 legislation following a significant narrowing of the UK regime in conjunction with Brexit. As noted above, the implementation of the MDR regulations will coincide with the repeal of the existing, pared back DAC 6 regulations.

Two key areas of interest emerged from the consultation. The first of these was the “look-back period” for the reporting of pre-existing arrangements, which stretched back to 29 October 2014 in the draft regulations (in marked contrast to the DAC 6 look-back period, which extended only to 25 June 2018). The second of these involves the mechanics for reporting and, specifically, the availability of an online manual reporting system.

Perhaps unsurprisingly, the vast majority of respondents objected to the proposed MDR extended look-back period, expressing concerns that the amount of work required to review the relevant files would be vastly disproportionate to the benefit to HMRC of reporting arrangements for that period as most businesses would not expect to uncover many, if any, reportable arrangements. Respondents also noted that many businesses do not maintain records going back more than six years, thus rendering compliance very difficult, if not impossible, for the earlier portion of the look-back period. Advisors and their taxpayer clients will no doubt be relieved to hear that the government has been receptive to these concerns, and has now decided that the look-back period will run from 25 June 2018 (consistent with DAC 6).

As regards the latter of the two key areas of interest, the reporting system was criticised by respondents on the basis that it would not be cost effective to build or purchase the software systems for generating the XML file format required for making reports, especially given the expectation of many respondents that only a limited number of reports will need to be made; those respondents instead expressed their preference for an online manual submission portal. The government has, however, concluded that it will not be able to provide a manual system, and that businesses have had a sufficient amount of time to make initial preparations such that MDR implementation should not be delayed on account of administrative concerns regarding the reporting system.

The government had previously indicated (and has now reiterated in the response document) that it will take a similar approach to that taken for DAC 6 in interpreting the MDR regulations. There was therefore a general theme in the more specific consultation responses that any divergent areas of interpretation should be clearly denoted in HMRC’s guidance. The government has accordingly said that “[i]n the coming weeks, HMRC will consider expanding the guidance and looking at some of the specific issues that were raised in responses to the questions” and that existing DAC 6 guidance (in the International Exchange of Information Manual) will be updated to the extent required to accord with the MDR regulations.

Please speak to your usual Weil London tax team contact if you would like further information regarding the UK’s implementation of the MDR.