HMRC is to press ahead with implementation of UK mandatory disclosure rules
Published on 9th Dec 2022
New regulations that follow a consultation response require in-scope tax advisers to consider their reporting processes
HMRC has published (24 November 2022) its long-awaited response to the consultation on the implementation of the Mandatory Disclosure Rules (MDR) in the UK. The consultation was launched in November 2021 and published alongside draft regulations.
The rules are designed to combat tax evasion by requiring taxpayers and advisers – which are referred to as "intermediaries" and include lawyers and accountants – with a UK nexus to report prescribed arrangements and structures to HMRC. Broadly speaking, the prescribed arrangements are those that are designed to facilitate non-compliance through the use of Common Reporting Standard (CRS) avoidance arrangements and opaque offshore structures.
The regulations will replace similar EU rules, known as DAC6, which were implemented in the UK via regulations (SI 2020/25) prior to its exit from the EU. When enacted, the regulations will become the International Tax Enforcement (Disclosable Arrangements) Regulations 2022 and SI 2020/25 will be repealed.
HMRC has made one major change to the draft regulations following the consultation. This concerns the "look back" period for reporting pre-existing arrangements that have been entered into and not already reported under DAC6. The proposed time period that stretched back to 29 October 2014 was more onerous than under DAC6 – although it is a more limited look-back exercise as it only applies to promoters (not service providers or taxpayers) in relation to CRS avoidance arrangements (not opaque offshore structures) with £1m financial de minimis.
Following widespread concern raised by advisers in the consultation that this period was overly onerous, the look-back period has been reduced to 25 June 2018, which is the same as under DAC6.
The other major announcement in HMRC's response is that it will not provide an online manual reporting system but will require any reporting to be done online using an Extensible Markup Language (XML) file format. HMRC highlights in its response that XML is the commonly agreed method for international automatic exchanges of information and it was not necessary to provide an alternative to the XML file format for reporting under UK MDR.
Due to the similarities of DAC6 in the UK and MDR, HMRC confirmed that its current International Exchange of Information Manual guidance on DAC6 will be used as a starting point for guidance under MDR. However, it will consider expanding the guidance and including specific issues raised in the consultation. HMRC has suggested it will provide further guidance on:
- The definition of "opaque offshore structures" where widely held investments and trusts are involved.
- Details around the "UK nexus", including what is meant by residence and place of management for intermediaries and taxpayers.
- The concept of "reportable taxpayer", with the guidance addressing the specific situations raised by the consultation respondents. It will confirm that that there should be a clear link between the reportable taxpayer and the arrangement.
HMRC expect the regulations will come into force in the first half of 2023, although the precise date is still to be determined. Any reportable arrangements that are made available by intermediaries or implemented by taxpayers after this date will need to be reported with 30 days of this happening. Any pre-existing arrangements going back to 25 June 2018 will need to be reported within 180 days after the rules are implemented.
Osborne Clarke comment
The scope of arrangements which are expected to be reportable under UK MDR are broadly similar to those already reportable under UK DAC6. In relation to the look-back period, although advisers who might be promoters in relation to CRS avoidance arrangements will still need to consider whether they have any arrangements that are within the scope of the new reporting rules, the shortening of the look-back period to 25 June 2018 to align with the DAC6 look-back period is welcome.
The response from HMRC that it requires reporting under the regulations to be done online using XML file format is, however, less welcome. Under DAC6 HMRC provided two different options for reporting: xml schema upload, or manual data entry online and many tax advisers had internally built software to be able to report any arrangements under DAC6 via the manual data entry online option. This means that those advisers will either need to re-build those internal processes or purchase third party software. In the large majority of cases, especially for tax advisers who are lawyers where reporting is likely to be rare (due to the exemption for legal professional privilege), this may be burdensome.