DAC6 is a mandatory reporting regime for intermediaries (including lawyers, accountants and others) involved in cross-border arrangements that bear hallmarks associated with tax avoidance and aggressive tax planning. The legislation is in the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, implementing EU Council Directive 2018/822. In the UK reports are made to HMRC. HMRC published guidance on the regulations on 1 July 2020 (HMRC IEIM 610000 onwards).
There is an important exception for lawyers, where to report would breach client confidentiality (referred to as “legal privilege” here). This means that in most cases legal privilege will prevent lawyers from making a report. However, the lawyer must notify other intermediaries (if any) involved in the transaction of the reporting obligation, provided that doing so does not breach legal privilege, and otherwise notify the client. The legal privilege exception does not mean lawyers can ignore DAC6. Many firms, however, will be involved in little or no cross-border work and for them compliance may not be overly onerous.
In addition to new arrangements from 1 July 2020, the reporting obligations also apply to arrangements entered into between 25 June 2018 and 30 June 2020 (“look back” arrangements).
The reporting deadlines were delayed in response to the coronavirus pandemic. The delayed reporting deadlines are:
- “look back” arrangements: 28 February 2021;
- arrangements between 1 July and 31 December 2020: within 30 days beginning on 1 January 2021;
- arrangements from 1 January 2021: 30 days from certain reporting trigger points.
Transactions the rules apply to
The regulations apply to “reportable cross-border arrangements”. Cross-border arrangements are arrangements that concern an EU member state and another country. The UK is treated as an EU member state for these purposes up until
31 December 2020, and it is expected that the DAC6 regime will continue to apply after the end of the transition period.
A cross-border arrangement is reportable if any of several hallmarks linked to tax avoidance and tax reporting apply to it. Some, but not all, require the main benefit or one of the main benefits of the arrangement to be obtaining a tax advantage. Some apply automatically. The analysis of the hallmarks has the potential to be a significant piece of work in itself. The width of the definition means that transactions which are purely commercial and have no tax motivation can be caught.
Who the rules apply to
The regulations apply to intermediaries involved in designing, marketing or organising reportable cross-border arrangements; or making them available for implementation (HMRC calls them “promoters”). They also apply to intermediaries who provide aid, assistance or advice if they knew, or could reasonably be expected to know, that a reportable cross-border arrangement was involved (HMRC calls them “service providers”). It is very unlikely that lawyers will be promoters. Lawyers who are involved with cross-border arrangements will almost always be within the scope of the definition of intermediaries, but as service providers, not promoters. The rules can apply even if the lawyer is not advising on tax issues.
A lawyer who is a service provider does not have to report unless they knew, or could reasonably be expected to know, that the arrangement fell within one of the hallmarks. The hallmarks are complex to apply, so this would require a good understanding of the tax issues. HMRC says that service providers are not expected to do any additional external due diligence beyond what they would normally do; and lawyers are only expected to read the information they would normally need to look at, and do not have to review everything to which they have access to check if a transaction is reportable. On the other hand, intermediaries cannot be wilfully blind or artificially split up information.
Client confidentiality/legal privilege
The legal privilege exception will almost always prevent lawyers from making a report to HMRC, unless the client has expressly waived privilege. If a report cannot be made without disclosing privileged information, the obligation does not arise, even though some of the information that would be disclosed is not privileged in itself (for example, information received from third parties). The privilege issues can be complex, and specialist advice may be needed in specific cases. The Law Society of England & Wales has published a guidance note on legal professional privilege and DAC6 which may be helpful: see www.lawsociety.org.uk/topics/tax/dac-6-and-lpp
Where privilege applies, the lawyer must notify other intermediaries involved that the arrangement is reportable, unless that would also breach privilege. If privilege prevents the lawyer from reporting, it is also likely to prevent them telling other intermediaries. In practice much of the relevant information may already have been shared with other intermediaries with the client’s consent, or the client may consent to a limited waiver of privilege to allow the intermediaries to discuss the reporting requirement. If there are no other intermediaries, or the client does not want to waive privilege, the reporting obligation shifts to the taxpayer who used the arrangement (in most cases, the client).
Time limits for making reports
From 1 January 2021 the time limit for making a report is 30 days from the earliest of the following triggers:
- the day after the arrangement is made available for implementation;
- the day after the arrangement is ready for implementation;
- the day the first step in implementation is made;
- for service provider intermediaries, the day after the day the intermediary first provided the aid, assistance or advice.
Where more than one intermediary is involved, all have a reporting obligation. However, an intermediary is exempted from the reporting obligation if another intermediary has made a report and the first intermediary holds evidence of that, and can demonstrate that it does not have any other reportable information relating to the arrangement. HMRC will issue the reporting intermediary with an arrangement reference number (ARN), which it must provide to the other intermediaries involved. The ARN is evidence that the report has been made.
Penalties apply for failure to comply with the reporting requirements, or failure to notify other intermediaries or the client that the transaction is reportable where legal privilege applies. The default penalty is a one off penalty of up to £5,000. The amount of the penalty is determined by HMRC, taking account of all the relevant facts. HMRC may choose not to charge a penalty, depending on all the facts and circumstances.
Penalties are appealable to the First-tier Tribunal. There is a reasonable excuse defence to a penalty and whether the intermediary had reasonable procedures in place to comply with the rules.
What does it mean for lawyers?
These rules have important implications for lawyers, even if legal privilege means they will rarely have to make a report. Firms should be preparing for DAC6 now, including:
- reviewing risk and compliance procedures;
- ensuring they can identify how and when legal privilege applies;
- putting procedures in place to identify cross-border arrangements at matter opening and keeping matters under review in case they become reportable;
- identifying “look back” arrangements;
- creating a central repository of cross-border arrangements and recording the outcome of reviews;
- recording details of DAC6 reviews and outcomes on individual files;
- making colleagues aware of the rules and providing clear guidance on internal procedures for dealing with DAC6;
- creating flow charts/decision trees to help colleagues decide if arrangements are reportable;
- reviewing letters of engagement to exclude DAC6 reviews from the scope of work, and to allow the firm the option of charging for reviews;
- where multiple intermediaries are involved, agreeing how the DAC6 compliance will be dealt with at the outset; and ensuring effective communication and co-ordination as the matter progresses.
The measures that are appropriate will vary from firm to firm and, depending on the types of work undertaken, may be relatively limited. As always, it is not enough to be compliant: compliance must also be demonstrated, so a little planning now may go a long way.
Heather Thompson is a partner with Brodies and a member of the Law Society of Scotland Tax Law Committee
- Criminal court briefing: Coronapocalypse?
- Employment: Unfairly anonymous?
- Family: When experts miss the mark
- Human rights: Judicial review refusal does not need oral hearing
- Pensions: Members' benefits: compensation and protection action
- Scottish Solicitors' Discipline Tribunal
- Property: Code to recovery
- In-house: “So, how are you?”