Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters and the UK has concluded TIEAs with 35 countries, including Aruba, Anguilla, Antigua & Barbuda, Belize, Bahamas, British Virgin Islands, Bermuda, Brazil, Cayman Islands, Curacao, Cyprus, Dominica, Grenada, Gibraltar, Guernsey, Hong Kong, Isle of Man, Jersey, Latvia, Liberia, Liechtenstein, Luxembourg, Macau, Marshall Islands, Mauritius, Monaco, Montserrat, Netherlands Antilles, Panama, San Marino, St. Kitts & Nevis, Saint Lucia, St. Vincent and Grenadines, Singapore, Turks and Caicos, and Uruguay.

Targeted Anti-Avoidance Rules (“TAAR”)

The UK operates several specific or targeted anti-avoidance rules (TAARs). See Sec. 13.1.2. for a coverage of TAARs.

Hybrid Mismatches

Effective 1 January 2017, HMRC introduced hybrid mismatch rules in line with the BEPS Action Plan 2. Effective from 1 January 2020, the hybrid mismatch rules were amended in line with the EU Anti-Tax Avoidance Directive (ATAD).

The rules apply to several hybrid mismatch types, including hybrid and other mismatches from financial instruments, hybrid transfer mismatches, hybrid payer mismatches, hybrid payee mismatches, companies with permanent establishments, and dual resident companies. Although specific rules apply for each mismatch type, the primary response, in general, is the disallowance of a deduction in the case of a UK payer and the inclusion as ordinary income in the case of a UK payee where the other jurisdiction has not disallowed a deduction.

The rules include a targeted anti-avoidance rule (TAAR) to counteract arrangements where:

The main purpose, or one of the main purposes, of those arrangements is to enable any person to obtain a tax advantage by avoiding the hybrid and other mismatch rules, or any overseas equivalent; and
If the TAAR did not apply, the arrangements would achieve that purpose.

In the event the TAAR counteracts such arrangements, an adjustment may be made by means of assessment, modification of an assessment, amendment, disallowance of a claim, or other adjustment as provided for by the TAAR.

The rules apply for payments involving hybrid entities or instruments that give rise to hybrid mismatch outcomes, including:

Deduction/non-inclusion mismatches arising from payments made on or after that date;
Deduction/non-inclusion mismatches arising from quasi-payments in a payment period beginning on or after that date;
Double deduction mismatches for accounting periods beginning on or after that date;
Imported mismatch payments arising from payments made on or after that date; and
Imported mismatch payments arising from quasi-payments in a payment period beginning on or after that date.

Certain retrospective amendments have been made to the hybrid mismatch rules with effect from 1 January 2017. In particular, this addresses scenarios with regard to U.S. groups where the UK entities may be disregarded as transparent entities for U.S. tax purposes, resulting in either a disallowance by the UK or dual inclusion income without a corresponding deduction.

HMRC has issued detailed guidance on tax implications for hybrid mismatches, updated with effect from August 2020, which may be accessed here.

Exchange of Cross-Border Tax Rulings

The United Kingdom has agreed to exchange tax rulings with eligible jurisdictions from 1 April 2016 in line with the implementation of BEPS Action 5. A specific ruling can be exchanged with a relevant jurisdiction if it is international in nature and affects the relevant jurisdiction. The exchange is possible if there is an agreement between The United Kingdom and the relevant jurisdiction providing for the spontaneous exchange of tax information. The agreement can be a tax information exchange agreement (TIEA), a tax treaty, or the OECD Multilateral Convention on Mutual Administrative Assistance in Tax Matters. Exchange is also required for “historical” rulings granted:

On or after 1 January 2014 but before 1 April 2016; or
On or after 1 January 2010 but before 1 January 2014, provided they were still in effect as of 1 January 2014.

Financial Account Information Reporting and Exchange

The United Kingdom acceded to the OECD Mutual Assistance Convention as amended and the convention entered into force for the United Kingdom on 1 October 2011. Effective September 2017, the United Kingdom has signed the Common Reporting Standard (CRS) Multilateral Competent Authority Agreement and adopted measures to implement the automatic exchange of financial account information in accordance with the global standard for the exchange of information developed by the OECD under the CRS.

Further, the United Kingdom has concluded an Intergovernmental Agreement (IGA) with the United States on 11 August 2014, to improve international tax compliance and to implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Mandatory Reporting of Cross-Border Tax Arrangements (MDR)

Effective 28 March 2023, the UK introduced new mandatory disclosure rules requiring the disclosure of cross-border arrangements, which could potentially facilitate tax evasion. The rules replace the DAC6 rules, which applied in the UK until the end of the BREXIT transition period, i.e., 31 December 2020. Until 28 March 2023, reporting under DAC6 was required only for arrangements which meet hallmarks under category D, i.e., only cross-border arrangements concerning the UK or an EU Member State.

The scope of the new mandatory disclosure rules is more restricted than the DAC6 scope as they are based on the OECD’s Model Mandatory Disclosure Rules and, therefore, are limited to Common Reporting Standard (CRS) Avoidance Arrangements and Opaque Offshore Structures. Similar to the DAC6 rules, the UK’s new rules require intermediaries incorporated, resident, or with a place of management in the UK to disclose specified arrangements to HMRC. In contrast to the DAC6 rules, however, they do not provide for a territorial delimitation and, therefore, may potentially apply to arrangements concerning the UK or any other jurisdiction.

Disclosable arrangements under the new rules are limited to:

Arrangements designed to undermine tax reporting under the CRS; and
The use of opaque offshore structures.

Disclosable arrangements that are made available or implemented after 28 March 2023 must be reported within 30 days from the triggering date. Pre-existing arrangements (in cases where the total value of the financial account subject to the avoidance arrangement was more than USD 1 million) must be reported within 180 days following the entry into force of the regulations (i.e., by 25 September 2023). In addition to the general rules, there is a retroactive reporting period for pre-existing arrangements entered into on or after 25 June 2018 and before 28 March 2023.

Under a secondary reporting obligation, the disclosure requirement may be shifted to a “Reportable Taxpayer”, being a UK resident taxpayer who is either the user of or the beneficial owner under one of the specified disclosable arrangements.

For the purpose of these rules:

CRS avoidance arrangements are defined as arrangements "for which it is reasonable to conclude that were designed to circumvent CRS Legislation or exploit an absence thereof";
An opaque offshore structure is defined as a passive offshore vehicle being a legal person or legal arrangement that does not carry on a substantive economic activity supported by adequate economic substance in the country of establishment; and
A reportable opaque structure is defined to mean one whereby "it is reasonable to conclude that it is designed to have the effect of allowing a natural person to be a beneficial owner of a passive offshore vehicle, while not allowing the accurate determination of such person’s beneficial ownership, or creating the appearance that such person is not a beneficial owner".

Failure to comply with the disclosure requirements may result in penalties of up to GBP 5,000, or if such amount is deemed inappropriately low by the tax authorities, GBP 600 for each day during which the failure continues.

Mandatory Reporting of Information by Digital Platform Operators

Effective 1 January 2024, the UK implemented mandatory reporting requirements for digital platform operators in line with the OECD Model Reporting Rules. The Rules require digital platform operators to report information about income earned by sellers of goods and services through their digital platforms. A digital platform generally consists of a website or an application that provides digital service facilitating interactions between two or more distinct but interdependent sets of users (whether firms or individuals) who interact through the service via the Internet.

The reporting obligations apply to reporting platform operators. A reporting platform operator is a digital platform operator (except an excluded platform operator) that meets any one of the following conditions:

Is a resident for tax purposes in the UK;
Is managed under the laws of the UK; or
Has a registered office, place of management, or permanent establishment in the UK.

An excluded platform operator is one whose entire business model:

Does not allow sellers to profit from received payments; or
Has no reportable sellers.

A relevant activity is an activity carried out for consideration, including the following:

Taxi and private hire;
Food delivery;
Finding freelance work; and
Letting of short-term accommodation.

The report is required to be submitted annually by 31 January of the following calendar year.

Failure to comply with the registration or reporting requirements may attract the levy of penalties as under:

A penalty of up to GBP 1,000 for not informing the tax authority whether the platform operator is a reporting platform operator or an excluded platform operator;
An initial penalty of up to GBP 5,000 and a continuing penalty of up to GBP 600 per day for not complying with the annual reporting requirements; and
A penalty of up to GBP 100 for each inaccurate, incomplete, or unverified seller’s record.

Ultimate Beneficial Ownership Disclosure

Resident companies registered in the UK, as well as non-resident companies having a place of business in the UK, are required to maintain a register disclosing information regarding persons of significant control (PSC).

A PSC is a natural person who meets one or more of the following conditions in relation to a legal entity:

Directly or indirectly holds more than 25% of the shares or voting rights;
Directly or indirectly holds the right to appoint or remove a majority of directors; or
Has the right to exercise, or actually exercises, significant influence or control.

Companies are required to record the methodology or steps taken to identify the PSC.

Beneficial Ownership Register for Foreign Companies Owning UK Property

Effective 1 August 2022, non-residents that own property or land in the UK are required to declare their beneficial owners and/or managing officers with the Companies House by 31 January 2023. The requirement also applies to foreign companies that wish to buy, sell, or transfer property or land in the UK.

The requirement applies to foreign companies that purchased property or land in the UK on or after:

1 January 1999 in England and Wales;
8 December 2014 in Scotland; and
5 September 2022 in Northern Ireland.

Failure to comply with the requirements attracts fines of up to GBP 2,500 per day or up to 5 years in prison, and may also entail restrictions on buying, selling, transferring, leasing, or charging their land or property in the UK.

Exit Tax Rules

Effective 1 January 2020, the UK has introduced exit tax rules in line with the EU Anti-Tax Avoidance Directive (ATAD1) on the unrealized value of assets to be considered as taxable income as prescribed under the Act (see Sec. 11.).

Offshore Receipts in Respect of Intangible Property

Effective 6 April 2019, income from intangible property held in low-tax jurisdictions is taxable in the UK to the extent that such income is in connection, directly or indirectly, with the sale of goods or services in the UK. The tax is levied at the rate of 20% (with a GBP 10 million de minimis UK sales threshold).

For this purpose, low-tax jurisdictions mean jurisdictions with whom the UK does not have a full tax treaty, i.e., a tax treaty that includes a non-discrimination article.

The tax will also apply if the income is received from entities resident in a jurisdiction with which the UK has a full tax treaty, but such income is taxed in that jurisdiction on a source or remittance basis, or if such entity is excluded from treaty benefits.

The rules also provide for an anti-avoidance rule (TAAR), which applies for arrangements entered into on or after 29 October 2018.

The offshore receipts in respect of intangible property rules are abolished for income arising on or after 31 December 2024 alongside the introduction of the OECD/IF Pillar Two Rules (see Sec.8.1.1.) in the UK which more comprehensively discourages multinational tax planning arrangements.

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