The UK replaces DAC6 with the OECD’s model Mandatory Disclosure Rules (MDR) post-Brexit

Emily Deane TEPThe disclosure of cross-border tax planning arrangements under Council Directive (EU) 2018/822 (DAC6) came into force on 1 July 2020 and requires reporting of any persons involved in cross-border arrangements, including loan agreements, payments from a resident of one country to a resident of another, or putting funds in an offshore trust, if one of the hallmarks apply.

Following the conclusion of negotiations between the UK and the EU on a Free Trade Agreement (FTA), HMRC confirms that only arrangements that meet hallmarks under category D of DAC6 need to be reported in the UK, in accordance with the OECD’s Mandatory Disclosure Rules (MDR).

The regulations have been amended and laid before Parliament to ensure the rules work correctly post-Brexit, including ensuring that references to EU member States refer to the UK or an EU member State after the end of the transition period. The rules will now only apply to two types of arrangements captured within the category D hallmarks:

  • Hallmark D1 is any ‘arrangement which may have the effect of undermining the reporting obligation under the laws implementing Union legislation or any equivalent agreements on the automatic exchange of Financial Account information, including agreements with third countries, or which takes advantage of the absence of such legislation or agreements’.
  • Hallmark D2 applies to an arrangement involving a ‘non-transparent legal or beneficial ownership chain’ with the use of persons, legal arrangements or structures:
    • that do not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises; and
    • are incorporated, managed, resident, controlled or established in any jurisdiction other than the jurisdiction of residence of one or more of the beneficial owners of the assets held by such persons, legal arrangements or structures;
    • where the beneficial owners of such persons, legal arrangements or structures, as defined in Directive (EU) 2015/849, are made unidentifiable.

The replacement of DAC6 will significantly reduce reporting requirements although the disclosure of tax avoidance schemes (DOTAS) will continue to apply in the UK. It is also clear that under the terms of the FTA, the UK must not reduce the level of protection in its legislation below the level of protection afforded by the OECD’s MDR. While the UK has not implemented MDR in its domestic legislation the rules provide a ‘level of protection’ which in certain respects is equivalent to that in the OECD’s MDR, and in other respects goes beyond it.

The government will begin to repeal the legislation implementing DAC6 in the UK and will implement the OECD’s MDR as soon as practicable, in order to replace DAC6 and transition from European to international standards on tax transparency. The government intends to consult on draft legislation to introduce MDR, and STEP will keep members apprised of the situation accordingly.

Update 6 January 2021: HMRC has confirmed to STEP that only arrangements which meet the hallmarks under Category D will now need to be reported, therefore historic reporting (for arrangements up to 31 December 2020) in respect of the other hallmarks will no longer be required.

Emily Deane TEP, STEP Technical Counsel

HMRC takes aim at inheritance tax planning

Robin VosImagine a client comes to you looking to reduce the inheritance tax bill on his death. He cannot afford to make outright gifts, and so instead you suggest he sets up a trust for his grandchildren and makes an interest free loan to the trust. The trust will invest in a UK authorised investment fund. The client is therefore just giving away the growth in value so that, over time, as the loan is repaid and the money spent, the client’s estate will reduce. Not an uncommon situation.

Under regulations proposed by HMRC, you may well be required to report this sort of planning to HMRC under the ‘Disclosure of Tax Avoidance Schemes’ (DOTAS) rules.

This is a serious matter. Failure to report when required to do so can lead to significant penalties for the ‘promoter’ as well as a range of other possible sanctions for both the promoter and the client.

The DOTAS regime was originally introduced in 2004 to ferret out information about marketed tax avoidance schemes. Arrangements only have to be notified if they fall within certain ‘hallmarks’. These include indicators such as whether the promoter is charging a premium fee or whether they ask clients to sign up to some sort of confidentiality agreement.

The DOTAS rules were first applied to inheritance tax in 2011. Currently they only apply to arrangements designed to get assets into a trust without paying the upfront 20 per cent lifetime inheritance tax charge.

In relation to other taxes, specific hallmarks were introduced to combat schemes in particular areas such as the use of losses, tax avoidance using financial products and attempts to get round the disguised remuneration rules for employment income.

However the proposed new regulations which will apply to inheritance tax are much wider. The starting point is that any planning which gives rise to an inheritance tax advantage will have to be notified if it contains steps which are ‘contrived or abnormal’.

The problem with inheritance tax planning is that much of what is done could be described as contrived or abnormal – ie the steps which are taken are not ones which somebody would normally take, unless they were trying to reduce their inheritance tax bill.

Targeting an entire tax with a filter based only on whether the arrangements are contrived or abnormal is a novel approach.

Whilst HMRC has promised guidance as to what it considers to be acceptable and what is not, the risk is that practitioners will be left not knowing whether what they are doing has to be notified. Many will make notifications just to be on the safe side. HMRC may well be overwhelmed with a deluge of notifications as a result.

The proposals are contained in a consultation paper issued on 20 April 2016. Anybody is free to respond to the consultation. Responses have to be submitted by 13 July 2016.

STEP will be submitting a response suggesting that the same approach should be taken for inheritance tax as with other taxes. This would mean that HMRC should identify specific areas where it sees abuse, and create hallmarks relating to those areas rather than attacking all planning which gives rise to any inheritance tax advantage.

The existing hallmark relating to attempts to get assets into trust, without paying the upfront inheritance tax charge, may not be the only area targeted. Others might include avoiding the reservation of benefit rules without incurring pre-owned assets tax, acquiring interests in excluded property settlements without falling foul of the existing anti-avoidance rules, abuse of agricultural property relief or business property relief and schemes to avoid inheritance tax ten year charges in relation to relevant property trusts.

As demonstrated by the example at the beginning of this article, the proposed regulations have the potential to affect much of the inheritance tax planning which practitioners will be dealing with on a daily basis. It certainly goes much wider than catching only abusive, marketed schemes.

The more responses HMRC receives, the more likely it is that it will understand that the regulations, as currently proposed, go too far.

 

Robin Vos TEP, a solicitor at Macfarlanes LLP in London, is chair of STEP’s UK Technical Committee