UK implementation of EU Mandatory disclosure of cross border arrangements

Mon 03 Feb 2020

HMRC has published responses to its consultation on implementation of rules concerning the implementation of EU mandatory disclosure of cross border arrangements.  These rules require the disclosure by ‘UK intermediaries’ or ‘UK relevant taxpayers’ of ‘cross border arrangements’ that meet one or more ‘hallmarks’.

Final regulations (SI 2020/25) implementing the rules have also been issued.  The Treasury has also produced a parliamentary report on how the regulatory powers for this measure are to be used in different Brexit scenarios.   

While the implementing regulations only come in to force on 1 July 2020, disclosure is required of reportable transactions that originate from 25 June 2018.  Good use should be being made of the time available to prepare for the introduction of these rules.  HMRC has yet to issue finalised guidance on how to apply these rules, but in the meantime, some notes on changes to the original consultation draft are set out below.

alto discuss how your business may be affected by these developments, please get in touch with a member of the Mazars International Tax Team.

The consultation response

The response document comments that the UK is limited by its current legal obligation to implement the EU Directive faithfully.  However it has amended the original draft regulations to provide for the following:

• amending the penalty regime to be proportionate, but flexible enough to deter non-compliance, while not unduly penalising those who make genuine mistakes.  The updated regulations make the levying of an initial daily penalty for non-compliance subject to application to the First tier Tribunal, and the default penalty will be £5,000.  The defence of reasonable excuse has also been refined by requiring HMRC or the Tribunal to consider whether the relevant person at fault maintains reasonable procedures for identifying disclosable transactions.
• limiting the scope of ‘tax advantage’ to only considering taxes covered by the Directive, instead of all taxes whether subject to the Directive or not.
• amending the rules to ensure that the same intermediary does not have an obligation to report in multiple jurisdictions.  The draft regulations imposed reporting on an intermediary according to whichever was the first of the four options of article 8ab(3) of the directive.  The third and fourth options included alternatives, so it would be possible for the intermediary to be subject to reporting in more than one jurisdiction if reporting was required as a result of the third and fourth alternative.  The regulations have been amended to exclude disclosure by the intermediary if required to disclose in another jurisdiction at all and has evidence of that disclosure having been made.
• ensuring that the scope of the rules is limited to UK intermediaries and does not apply to those without a UK connection, as intended by the Directive. The original draft regulations imposed reporting obligations on ‘intermediaries’ and ‘relevant taxpayers’.  The updated regulations impose reporting on ‘UK intermediaries’ and ‘UK relevant taxpayers’.
• ensuring that the rules are compatible with legal professional privilege (LPP). We will work with stakeholders on the guidance to ensure it does not inadvertently risk impacting on LPP. The original draft regulations appeared to impose reporting regardless of LPP.  This has been corrected in the updated regulations. 

In relation to hallmark E3 Brexit related reorganisations could still be within scope.  The response document comments: “The Government does not consider that it would be appropriate to carve out Brexit-related re-organisations from the legislation, as that would not be in keeping with the wording or the spirit of the Directive”.

Technical consultation document: Fifth Money Laundering Directive and Trust Registration Service

The parliamentary report

The parliamentary report sets out the planned approach in the event that either by 31 January 2020 (i) there is no negotiated withdrawal agreement nor a framework for a future relationship with the UK ratified by Parliament, and (ii) the event that agreement on withdrawal or a future relationship is reached and ratified.  The document indicates that

• While the UK is obliged to implement the Directive into UK law. 
• If the UK leaves the EU with or without a framework for a future relationship the UK may make consequential, supplementary transitional or saving provisions by amending, repealing or revoking the regulations (SI 2020/25). This appears to leave the UK Government flexibility to amend SI 2020/25 as it deems appropriate.