DAC6 is a European regulation aimed at reducing international tax evasion and promoting transparency. The Directive requires law firms to report some forms of tax advice and tax transactions. These “mandatory disclosure requirements” (MDR) are for tax transactions that cross EU borders, where it seems that the primary purpose of the transaction is a tax advantage.

DAC6, like the original Money Laundering Directive, is a fundamental shift to the way that law firms operate. It is not merely a change for compliance teams, it affects the entire practice, including engagement letters, practice management systems and anyone involved in any tax advice.

A comprehensive DAC6 solution requires integration between the different systems involved in practice management.

Back in May 2018 the Economic and Financial Affairs Council of the European Union (ECOFIN) adopted the 6th Directive on Administrative Cooperation (“DAC6 Directive”). This new directive requires tax intermediaries to report specific cross-border arrangements. 

In July 2019, HMRC released their draft DAC6 legislation together with their consultation document. These documents indicate that HMRC intends to align its reporting requirements with the DAC6 Directive, and HMRC will require intermediaries to report any additional information. 

Download a guide to DAC6 compliance

Who needs to report?

Any entity that acts as an intermediary for a cross-border transaction involving an EU Member State may have an obligation to report this to HMRC or a different EU tax authority.

On 25 May 2018, the Economic and Financial Affairs Council of the European Union (ECOFIN) adopted Council Directive (EU) 2018/822, also known as the 6th Directive on Administrative Cooperation (DAC6), requiring tax intermediaries to report certain cross-border arrangements that contain at least one of the hallmarks defined in the Directive. The aims of DAC6 is to tackle tax evasion and avoidance, strengthen tax transparency and improve information sharing between EU Member States.

Count how many times you said the word “tax” this week. Easy? How about every time this month? Harder? All right, what about every time you said the word “tax” to a client in the last 18 months? Still confident about the number?

Now, think about every time that could have been construed as advice. What about doing transactions with other countries or thinking about tax planning measures? All of these instances might need to not only be remembered, but also recorded and reported to the national tax authority.

VinciWorks hosted a round table meeting at the office of Paul Hastings Solicitors with representatives from over 25 firms to discuss DAC6 and its implementation following HMRC’s Consultation Document and Draft Legislation. Ahead of the meeting, I was in touch with HMRC to ask them some questions relating to the proposed DAC6 legislation.

Here is an overview of the discussion:

Main Benefit Test

Are UK law firms expected to have in depth knowledge of how other member states will interpret the Main Benefit Test?

The consultation is clear that HMRC views the “main benefit test” as an objective test: what matters is whether a tax advantage is the main or one of the main benefits that the person entering into the arrangement might reasonably be expected to obtain from the arrangement. That person’s actual motivation in entering into the arrangement is not relevant.

HMRC consider that it is necessary to look at the tax effect of the arrangement as a whole, but they recognise there are challenges to this and are considering how this will work in different examples.

HMRC has just released its draft regulations on implementing the 6th Directive on Administrative Cooperation, known as DAC6, into UK law. From 1 July 2020, taxpayers and their advisers are required to report details of certain cross-border arrangements that could be used to avoid or evade paying tax to HMRC. The UK has been lagging behind their European counterparts in producing draft DAC6 legislation.