Implementing the OECD mandatory disclosure rules: HMRC response

Update: The International Tax Enforcement (Disclosable Arrangements) Regulations 2023 have now been laid before Parliament and will come into force with effect from 28 March 2023. Arrangements entered in on or after this date must be reported to HMRC under these rules. The International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (DAC6 regulations) will be repealed at the same time and therefore any arrangements entered into on or after 28 March will not be reportable under the DAC6 regulations. However, the DAC6 reporting portal will remain open for one month to allow arrangements entered into before 28 March 2023 to be reported under the DAC6 regulations.

HMRC has published a response document in relation to the UK implementation of the OECD mandatory disclosure rules. The response confirms that the new rules will be introduced in the first half of 2023 and will replace the existing, similar rules based on DAC6. However, importantly, HMRC has confirmed that the rules will no longer require backdated reporting of pre-existing arrangements entered into before 25 June 2018.

Background

The EU DAC6 reporting regime was introduced in July 2020, but significantly delayed in many Member States, including the UK, due to the COVID-19 pandemic. Since it was not implemented in the UK until after the end of the transition period, the UK announced that, rather than implementing the rules in full as originally intended, the UK would restrict its application to one hallmark only, Hallmark D.

Hallmark D covers the use of opaque offshore structures and the avoidance of reporting under the Common Reporting Standard (CRS) and retaining this aspect of the DAC6 rules was intended to align the UK with OECD rules rather than DAC6. However, at the time, HMRC indicated that it would in due course consult on and implement the OECD’s disclosure principles directly to replace DAC6. A consultation document and draft regulations were published in November 2021. Simmons & Simmons responded to the consultation.

The OECD Model Rules require promotors, service providers and taxpayers to report to HMRC information concerning arrangements and structures that are designed to circumvent the CRS rules or exploit an absence thereof or involve opaque offshore structures as defined in the Model Rules. For more details of the consultation see our article, Implementing the OECD mandatory disclosure rules: consultation.

HMRC consultation response

The consultation response notes that two main issues emerged from the consultation: the period of look-back for reporting transactions that are caught by the rules; and the reporting format.

As regards, reporting pre-existing arrangements, respondents argued that requiring businesses to look-back to arrangement entered into since 29 October 2014 was disproportionate. Whilst this was a position envisaged in the OECD Model Rules, this would be a longer look-back than had been required by DAC6 and would present many administrative burdens for businesses. Whilst it was recognised that mitigations had been included in the rules (such as only applying it to promotors and only to CRS avoidance arrangements with a value above $1m) these would not wholly prevent a disproportionate administrative burden arising.

In its response, the government has accepted these arguments and will now only require reporting of pre-existing arrangements from 25 June 208 (the same requirement as under DAC6).

The second major concern related to HMRC’s intention to require all reporting to be made online using an XML file format. This is the commonly agreed method for international automatic exchange of information, including under the CRS. However, businesses pointed out that reporting under the OECD Model was very different from other types of exchange of information such as CRS, since the volumes of reporting would be very low and sporadic. If businesses did not already have compatible XML software, they would be forced to develop or buy compatible software. Instead, businesses requested that an alternative form of manual reporting should be provided by HMRC.

The government response states that the government had decided that it is not able to provide an alternative manual system for reporting. The government considers that most intermediaries will be familiar with the existing portal and HMRC will discuss with other businesses how it can support them with the required reporting method.

Timing

The response document confirms that the new regulations will come into force in the first half of 2023 and, at the same time, the existing International Tax Enforcement (Disclosable Arrangements) Regulations 2020 (implementing DAC6, in part) will be repealed.

Any reportable arrangements that are made available by intermediaries or implemented by taxpayers after the new rules come into force will need to be reported within 30 days. Any pre-existing CRS reporting avoidance arrangements going back to 25 June 2018 will need to be reported within 180 days after the rules come into force. Arrangements already reported under the DAC6 regulations will not need to be reported.