On 30 June 2020, HMRC published its long awaited final guidance on DAC 6 and the UK’s implementing regulations in its International Exchange of Information Manual. It is largely consistent with draft guidance circulated back in March 2020. While it sheds further light on a number of points, a number of questions that practitioners have been grappling with are left unanswered.
Helpfully, the guidance confirms that it will generally be necessary to take a ‘holistic’ approach in determining what constitutes an ‘arrangement’, rather than viewing each step or series of steps in a transaction as a standalone arrangement. This is a welcome approach for those who may have questioned the practicalities of applying a detailed hallmark analysis to each individual step in a complex cross-border transaction. It is also consistent with HMRC’s position on the ‘main benefit test’ (applicable to certain of the DAC 6 hallmarks), where HMRC states ‘it is essential to look at the arrangement as a whole’ when applying the test. The final guidance also now explains that, in cases where a pre-existing arrangement is extended, this would not generally be viewed as a ‘new’ arrangement, barring a ‘material change’ (begging the question as to how that term should be interpreted).
The guidance preserves some helpful examples from the draft guidance of when an arrangement may ‘concern’ more than one jurisdiction for the purposes of evaluating the ‘cross-border’ requirement. For example, a stamp duty liability in ‘jurisdiction B’ arising as the result of a transfer of shares between two companies both resident in ‘jurisdiction A’ would not generally concern multiple jurisdictions; on the other hand, the flow of funds from one jurisdiction to another will almost always concern multiple jurisdictions. In addition, there are some new ‘cross-border’ clarifications: for instance, it now seems that, to be a ‘participant’ for the purposes of the rules the relevant person must have ‘some active involvement’ in the arrangement.
The final guidance additionally provides some further clarifications on the scope of the hallmarks – for instance, further examples are included on hallmark B2 (conversion of income into capital). It also helpfully specifies that the use of precedent documentation should not generally trigger hallmark A3 (standardised documentation and structures). However, the scope of some hallmarks, e.g. hallmark E3 (cross border transfers), is still decidedly vague, leaving those hallmarks open to confusion and potential misapplication. The guidance also omits discussion of certain common (non-UK) features of cross-border M&A and financing transactions, and how such features should be assessed for UK reporting.
One area of concern is how an intermediary with limited knowledge or expertise is able to apply the rules to determine whether a hallmark applies. The guidance confirms previous statements that service provider intermediaries are not expected to do any additional due diligence to determine whether an arrangement is reportable. HMRC now also expressly acknowledges that there may be situations where a person is too far-removed from the detail of an arrangement to assess whether that arrangement is reportable and, in that case, such person would not be a service provider.
Those familiar with the draft guidance may have remarked on the lack of information on ‘reasonable procedures’ (in connection with the ‘reasonable excuse’ defence against penalties). The final guidance now covers this, albeit in general, high-level terms noting that: ‘What is reasonable will depend on the circumstances.’
Finally, the application of legal professional privilege has been a hot topic since the introduction of DAC 6. The commentary in the final guidance remains unchanged on this, which will be a disappointment to those who had hoped for an acknowledgement of the Law Society’s Q&A on this subject.
Although the final guidance leaves advisers with quite a bit to digest, it is a relief for many that the recent announcement of the UK’s decision to defer its DAC 6 implementation by six months will leave more time to do so.
On 30 June 2020, HMRC published its long awaited final guidance on DAC 6 and the UK’s implementing regulations in its International Exchange of Information Manual. It is largely consistent with draft guidance circulated back in March 2020. While it sheds further light on a number of points, a number of questions that practitioners have been grappling with are left unanswered.
Helpfully, the guidance confirms that it will generally be necessary to take a ‘holistic’ approach in determining what constitutes an ‘arrangement’, rather than viewing each step or series of steps in a transaction as a standalone arrangement. This is a welcome approach for those who may have questioned the practicalities of applying a detailed hallmark analysis to each individual step in a complex cross-border transaction. It is also consistent with HMRC’s position on the ‘main benefit test’ (applicable to certain of the DAC 6 hallmarks), where HMRC states ‘it is essential to look at the arrangement as a whole’ when applying the test. The final guidance also now explains that, in cases where a pre-existing arrangement is extended, this would not generally be viewed as a ‘new’ arrangement, barring a ‘material change’ (begging the question as to how that term should be interpreted).
The guidance preserves some helpful examples from the draft guidance of when an arrangement may ‘concern’ more than one jurisdiction for the purposes of evaluating the ‘cross-border’ requirement. For example, a stamp duty liability in ‘jurisdiction B’ arising as the result of a transfer of shares between two companies both resident in ‘jurisdiction A’ would not generally concern multiple jurisdictions; on the other hand, the flow of funds from one jurisdiction to another will almost always concern multiple jurisdictions. In addition, there are some new ‘cross-border’ clarifications: for instance, it now seems that, to be a ‘participant’ for the purposes of the rules the relevant person must have ‘some active involvement’ in the arrangement.
The final guidance additionally provides some further clarifications on the scope of the hallmarks – for instance, further examples are included on hallmark B2 (conversion of income into capital). It also helpfully specifies that the use of precedent documentation should not generally trigger hallmark A3 (standardised documentation and structures). However, the scope of some hallmarks, e.g. hallmark E3 (cross border transfers), is still decidedly vague, leaving those hallmarks open to confusion and potential misapplication. The guidance also omits discussion of certain common (non-UK) features of cross-border M&A and financing transactions, and how such features should be assessed for UK reporting.
One area of concern is how an intermediary with limited knowledge or expertise is able to apply the rules to determine whether a hallmark applies. The guidance confirms previous statements that service provider intermediaries are not expected to do any additional due diligence to determine whether an arrangement is reportable. HMRC now also expressly acknowledges that there may be situations where a person is too far-removed from the detail of an arrangement to assess whether that arrangement is reportable and, in that case, such person would not be a service provider.
Those familiar with the draft guidance may have remarked on the lack of information on ‘reasonable procedures’ (in connection with the ‘reasonable excuse’ defence against penalties). The final guidance now covers this, albeit in general, high-level terms noting that: ‘What is reasonable will depend on the circumstances.’
Finally, the application of legal professional privilege has been a hot topic since the introduction of DAC 6. The commentary in the final guidance remains unchanged on this, which will be a disappointment to those who had hoped for an acknowledgement of the Law Society’s Q&A on this subject.
Although the final guidance leaves advisers with quite a bit to digest, it is a relief for many that the recent announcement of the UK’s decision to defer its DAC 6 implementation by six months will leave more time to do so.
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