UK implements OECD Model Disclosure Rules

The UK has now introduced regulations to implement the OECD Model Disclosure Rules (MDR) in the UK. The rules will come into force from 28 March 2023 and replace the existing rules which implement part of the EU DAC6 rules. The new rules are heavily based on, and reliant on the definitions in, the OECD MDR and there is a look-back period to 25 June 2018.

Compliance with the rules will require affected intermediaries to make reports to HMRC using the XML software made available by HMRC, which may prove administratively burdensome for intermediaries or taxpayers that do not regularly report other information (such as under the Common Reporting Standard) already.

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 MDR 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 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

New UK rules

The UK has now enacted legislation in the form of the International Tax Enforcement (Disclosable Arrangements) Regulations 2023 to give effect to MDR in the UK and these come into force with effect from 28 March 2023. Arrangements entered in on or after this date must be reported to HMRC under these new 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.

To whom do the rules apply?

The rules apply to “intermediaries” that either make a CRS avoidance arrangement or opaque offshore structure (OOS) available for implementation or provide relevant services in respect of that arrangement or structure provided that they are either resident in the UK, incorporated in the UK, have their place of management in the UK or provide the relevant services through a UK branch or office.

The regulations essentially adopt the definitions from the OECD MDR for these purposes including:

• A CRS Avoidance Arrangement is any arrangement for which it is reasonable to conclude that it is designed to circumvent or is marketed as, or has the effect of, circumventing CRS legislation or exploiting an absence thereof. An arrangement is not considered to have the effect of circumventing CRS legislation solely because it results in non-reporting under the relevant CRS legislation, provided that it is reasonable to conclude that such non-reporting does not undermine the policy intent of such CRS legislation (MDR Rule 1.1).
• An Opaque Offshore Structure (OOS) is defined as a passive offshore vehicle that is held through an Opaque Structure. A passive offshore vehicle means a legal person or arrangement that does not carry on a substantive economic activity supported by adequate staff, equipment, assets and premises in the jurisdiction where it is established or is tax resident (with an exception for institutional investors and arrangements where all beneficial owners are only tax resident in the jurisdiction of that structure). An opaque structure is a structure for which it is reasonable to conclude that it is designed to have, marketed as having, or has the effect of allowing, a natural person to be a beneficial owner of a passive offshore vehicle while not allowing the accurate determination of such person’s beneficial ownership or creating the appearance that such person is not a beneficial owner (MDR Rule 1.2)
• An intermediary is any person responsible for the design or marketing of a CRS avoidance arrangement or OOS (defined as a promoter) and any person that provides relevant services in respect of a CRS avoidance arrangement or OOS in circumstances where the person providing such services could reasonably be expected to know that the arrangement or structure is a CRS avoidance arrangement or an OOS ( defined as a service provider) (MDR Rule 1.3).

What are the obligations of an intermediary?

An intermediary must make a return setting out specified information in respect of the relevant arrangement or structure within 30 days of the day after the day on which the intermediary either (i) makes the CRS avoidance arrangement or OOS available for implementation or supplies relevant services in respect of that arrangement or structure.

However, the rules do not require an intermediary to disclose any information that is covered by legal professional privilege. In such circumstances, an intermediary must provide written notice to the client that the client must instead make a return themselves instead. It may be noted that this is different to the DAC6 rules which require an intermediary to notify other intermediaries and have found to be contrary to EU law in a recent decision, see DAC6 and LPP.

In addition, an intermediary is not required to include information in a return to the extent that the information has previously been disclosed to HMRC or has been disclosed to a partner jurisdiction by a local branch or place of management there.

If there is no intermediary required to make a return or if the intermediary is not required to make the return due to LPP, then the obligation to make a return falls on the taxpayer which is the user of the arrangement or structure.

Where an intermediary (or taxpayer) makes a return under these rules, then they must also notify other intermediaries by written notice of the fact that they have done so within 30 days of making that return.

Returns must be made on the electronic system put in place by HMRC. Returns made in any other format will not be accepted and will be treated as not having been made. This was an issue raised by the earlier consultation and which caused a degree of concern. An XML file format 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. This will particularly be the case where taxpayers themselves are required to report information due to LPP restrictions. Despite these concerns, the government response decided not to provide an alternative manual system for reporting.

Geographical scope

Under the UK DAC 6 rules, there is a requirement that the arrangement is “cross border” i.e. concerns at least one EU member state or the UK. There is no such requirement under the new UK MDR rules, which changes the geographical scope of the rules going forwards. Accordingly, whilst there must be a connection with the UK for UK reporting obligations to arise (such as the intermediary being incorporated in the UK or having a UK branch making the arrangements available), the actual arrangements or structure need not directly involve the UK to be reportable in the UK.

Whilst no reporting obligation will arise where a report has been made in a “partner jurisdiction”, the regulations do not currently specify any partner jurisdictions. This means that arrangements may need to be reported in both the UK and in other jurisdictions that operate the OECD MDR or similar rules (including the EU’s DAC6). Under the current UK DAC 6 rules, the UK recognises reports made in the EU as discharging the obligation to make a report in the UK (although the EU does not recognise reports made in the UK), but unless and until the UK specifies a list of partner jurisdictions, this will not apply to the UK MDR.

Penalties

The regulations provide for penalties for failure to comply with the new rules. Generally, the penalties are an amount up to £5,000 and £600 per day for continuing failure after a penalty has been imposed.

There is no penalty if a taxpayer satisfies HMRC (or the First-tier Tax Tribunal) that there is a reasonable excuse for the failure. However, reliance on legal advice will not provide a reasonable excuse where that advice:

• Was provided by an intermediary
• Was not based on full and accurate description of the facts or
• the conclusions in the advice were unreasonable.

In addition, HMRC must take into account whether the person maintains such procedures as it is reasonable in all the circumstances to have in place to identify CRS avoidance arrangements or OOS and compliance with the obligations in the new rules.

Retrospection

The new rules will apply where an obligation to report arrangements or structures arises on or after 28 March 2023. However, despite the fact that a modified form of DAC6 applies in the UK until that date, the rules do have a restricted retrospective aspect. The retrospective requirements only apply to intermediaries that are promoters however (not service providers).

Where a person was a promoter in respect of a CRS avoidance arrangement which was implemented between 25 June 2018 and 27 March 2023, the person must make a return on or before 25 September 2023. However, a return is not required if either the aggregate balance or value of the transaction was less than US$1m or a return was already made under the DAC6 regulations.

The government’s original proposal was to require reporting of pre-existing arrangements looking back to arrangements entered into since 29 October 2014, as envisaged in the original OECD Model Rules. Respondents to the consultation argued that this would be disproportionate in the light of DAC6. As a result, the government accepted these arguments and will now only require reporting of pre-existing arrangements from 25 June 2018 (the same requirement as under DAC6).

It should be noted, however, that since the geographical scope of the UK MDR is wider than the DAC6 rules, intermediaries who have fully complied with their UK DAC 6 obligations may still have other pre-existing arrangements to report under the new UK MDR rules.

Guidance

On 3 February 2023, HMRC published high-level guidance on reporting under UK MDR. However, further, more detailed guidance on the new regulations is due to be published before the rules come into force. It is expected that this guidance will be based heavily on the existing DAC6 guidance, except where changes are necessary to ensure alignment with MDR.