If you have been or are in the arena of tax planning, you may feel a little vexed at the continual approach by HMRC to reduce your ability to earn fees:
- AML stopped the days of carrying cash over to Jersey and depositing it with your friendly bank manager. Jersey (amongst others), a highly respected offshore tax haven will deny this ever happened, but it did!
- Trusts established by offshore settlors to hide the real settlor has been stopped by KYC.
- Schematic planning is subject to constantly evolving, poorly written legislation and inefficient investigatory approaches by HMRC, which is just tiring.
Where is the fun? It is just not fair! I have an idea, HMRC should give professionals and taxpayers one year every ten to conjure up as much tax planning and structures as they (the profession) can without prejudice or recourse. If HMRC is unable to successfully challenge the planning by the next one-year window, the taxpayer wins and keeps their tax saving or tax favoured structure. That would be a gentlemanly approach to the sport.
But no, instead we had DAC6 and soon the Mandatory Disclosure Rules. The consultation period for the ‘Mandatory Disclosure Rules’ closed on 8 February 2022 and we currently await the results. The consultation followed the Autumn Budget on 27 October 2021 and the tax policy documents published on 30 November. Amongst those documents was the consultation on the implementation of the OECD’s model mandatory disclosure rules for Common Reporting Standard (CRS) Avoidance Arrangements and Opaque Offshore Structures.
The implementation is due this summer. The scope of arrangements expected to be reportable are broadly similar to those already reportable under DAC6 (the European Union equivalent).
The UK implemented DAC6, which came into force on 1 July 2020. DAC6 required ‘intermediaries’ (law firms, accountants and tax advisors) from 1 January 2021 to report to HMRC cross-border arrangements that met one of the ‘hallmarks’ (A to D) that could be used to avoid or evade tax. Intermediaries have to disclose relevant arrangements where the first step was taken on or after 25 June 2018.
DAC6 hallmark summary:
|A1. Confidentiality on tax advantage |
A2. Fees contingent on tax advantage
A3. Standardized documents/structures
|B1. Combined steps to access losses |
B2. Conversion of income
B3. Round-tripping of funds
|C1. Cross border payments (low/no tax) |
C2. Double dip
C3. Double relief
C4. Consideration mismatch
|D1. Circumventing the automatic exchange of information |
D2. Non-transparent legal or beneficial ownership
|E1. Unilateral safe harbour rules
E2. Transfer of hard to value intangibles
E3. Transfer of substantial functions/assets/risks
Once the new MDR are implemented they will replace DAC6. MDR will require ‘intermediaries’ to provide information about arrangements and structures designed to facilitate non-compliance through the use of CRS avoidance arrangements and opaque offshore structures to HMRC. Intermediaries include:
- Promoters: those who design or market the arrangement
- Service providers: those who assist or aid the implementation of the arrangement, and
CRS avoidance arrangements captures 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 opaque offshore structure is defined as being a passive offshore vehicle held through an opaque structure (obscuring beneficial ownership).
The consultation proposes a greater lookback period than that under DAC6. The proposed lookback period would include arrangements entered since 29 October 2014! Furthermore, MDR does not have any territorial limitations – arrangements and structures will be reportable regardless of jurisdiction. The intermediary or taxpayer will need a UK reporting obligation i.e. resident, incorporated or managed and controlled in the UK.
Without limitation, intermediaries and taxpayers would face onerous obligations to review historic arrangements. Proposed limitations include:
- The regulations will only require reporting of CRS avoidance arrangements.
- The reporting requirement applies only to promoters.
- The reporting requirement will only be engaged where the value of the financial account immediately prior implementing the arrangement was more than US$1m (or sterling equivalent).
- Arrangements disclosed under DAC6 do not have to be disclosed again.
The draft UK MDR regulations, in line with the approach in the Model Rules, do not include any such territorial limitations and so arrangements and structures will be reportable regardless of which jurisdictions they involve, as long as the intermediary or taxpayer has a reporting obligation in the UK. This will be met if the intermediary or taxpayer has a UK nexus (for example it is resident or incorporated in the UK or has its place of management in the UK).
So when did it ever become gentlemanly in sport:
- to have to tell someone what you’ve started to do but not finished, or
- what you have done without knowing you would have to tell them what you have done?
The proposition is that of reporting, which results in a response of asking questions and inevitably a debate on whether it is right, wrong or ineffective. Could we just have clearer laws in the first place? I fear that by giving HMRC officers more to look at and reflect on will overburden a somewhat stretched workforce. This is before the officer looking into ‘it’ doesn’t understand ‘it’ or just keeps asking questions for a few years. I am currently for a return to sport!