DAC 6 and legal professional privilege

What is DAC 6?

DAC 6 is EU Directive 2018/822. It introduces new disclosure and reporting rules for intermediaries involved in designing and promoting cross-border schemes that have certain hallmarks related to tax and tax reporting.

How is DAC 6 implemented into UK law?

On 9 January 2020, the International Tax Enforcement (Disclosable Arrangements) Regulations 2020, Statutory Instrument 2020 No. 25 (the Regulations) were made.

The Regulations implemented DAC 6 into UK law but, after they were made, were amended by two further sets of regulations outlined below. The government consulted on a draft of the Regulations in 2019.

The first set of amending regulations (the International Tax Enforcement (Disclosable Arrangements) (Coronavirus) (Amendment) Regulations 2020) were made in July 2020 by HM Treasury and legislated for a six-month deferral of UK DAC 6 reporting deadlines (moving the deadlines for first reports in the UK from July and August 2020 to dates in January and February 2021).

The second set of amending regulations (the International Tax Enforcement (Disclosable Arrangements) (Amendment) (No 2) (EU Exit) Regulations 2020) were made on 29 December 2020 and significantly limited the scope of DAC 6 reporting in the UK.

Only arrangements bearing one of the hallmarks under category D of DAC 6 are retained for UK reporting purposes. The D hallmarks cover arrangements, broadly speaking, of two types:

• arrangements which may have the effect of undermining reporting obligations concerning the automatic exchange of information
• arrangements which obscure beneficial ownership

Read more about these hallmarks in HMRC's International Exchange of Information Manual.

We understand that the UK will consult on and implement the new regime around the OECD's Mandatory Disclosure Rules as soon as practicable to replace DAC 6.

How will this affect lawyers?

DAC 6 will have important reporting and compliance implications for lawyers who advise on cross-border arrangements, although the scope of arrangements that are reportable in the UK has reduced significantly as a result of the UK Regulations made on 29 December 2020.

Broadly, DAC 6 requires EU governments and the UK to impose a disclosure obligation on ‘intermediaries’ who advise on, or are involved in, implementing ‘cross-border arrangements’. A lawyer involved in such a transaction will nearly always be an intermediary.

The Regulations provide an exception from the disclosure obligation where to do so would be in breach of legal professional privilege (LPP). Where the exception applies, the lawyer is required to notify other intermediaries or the ‘relevant taxpayer’ of their disclosure obligations under the rules, provided that doing so does not itself breach LPP.

Reports in the UK need to be made by reference to various trigger dates for arrangements:

• if the first step in the implementation of a reportable arrangement was taken between 25 June 2018 and 1 July 2020, the arrangement must be reported by 28 February 2021
• if the relevant reporting trigger fell between 1 July 2020 and 31 December 2020, the arrangement must be reported by 30 January 2021
• if the reporting trigger falls on or after 1 January 2021, the arrangement must be reported within 30 days

Originally, the first reporting deadlines under DAC 6 were due to happen in July and August 2020.

If you’re responsible for risk and compliance processes, you may wish to review your firm’s internal processes to ensure that everyone is compliant with the Directive and Regulations.

What is LPP?

LPP protects confidential communications, and material evidencing such communications, between clients and/or their lawyers from being disclosed. In some circumstances it also protects communications between clients/lawyers and third parties.

LPP is a fundamental right that makes the right to legal advice effective in practice and underpins the rule of law. There are two types of LPP:

• legal advice privilege
• litigation privilege

See our practice note on LPP 

What is legal advice privilege?

Legal advice privilege applies to confidential communications between solicitors and clients for the dominant purpose of giving and obtaining legal advice and assistance. It has been construed broadly and includes advice on what should prudently and sensibly be done in the relevant legal context.

Legal advice privilege also protects communications made confidentially between solicitor and client aimed at keeping both informed so that advice may be sought and given as required.

These Q&As focus on legal advice privilege as it’s likely to be most relevant in the context of DAC 6.

What is litigation privilege?

Litigation privilege applies to confidential communications between lawyers or their clients and any third party made for the sole or dominant purpose of conducting existing or reasonably contemplated litigation which is adversarial rather than investigative. The communications must also have been created for the purpose of obtaining legal advice or information relating to the litigation.

Litigation privilege is less likely to be relevant in the context of DAC 6. 

Is a lawyer allowed or required to report privileged material under DAC 6 or the Regulations?

No. Regulation 7 (1) provides that nothing in the Regulations requires a UK intermediary to disclose any privileged information. This is defined to mean: “information with respect to which a claim to legal professional privilege… could be maintained in legal proceedings.” (Regulation 7(3)).

It’s also a primary obligation of a lawyer to preserve that LPP under professional conduct rules and the common law. If your client consents to your reporting and thereby waives LPP over the relevant material, you may be allowed and required to report.

What does LPP mean for reporting under DAC 6?

The LPP exception in DAC 6 means that lawyers need to consider whether any information they would otherwise be required to disclose to HMRC under the DAC 6 regime is protected by LPP. 

In doing so, lawyers should ask themselves whether such information forms part of, or would otherwise reveal, the substance or subject matter of confidential communications that have passed between them and their clients for the dominant purpose of obtaining and giving legal advice. If so, we consider that the information is protected by legal advice privilege and should not be disclosed.

In most cases, we expect that LPP will prevent a lawyer who has advised a client about a reportable cross-border arrangement from making a report under DAC 6. 

Making a report under DAC 6 would imply that the lawyer has given advice in relation to an arrangement that they consider meets the legal definition of being a ‘cross-border reportable arrangement’.  It would therefore tend to reveal the nature of advice given and the substance of privileged communications between lawyer and client. 

If the lawyer is also engaged to advise on DAC 6, making a disclosure would also effectively reveal the conclusion of that advice.  Where this happens and the reportable information is privileged, the lawyer cannot disclose it under DAC 6, unless the client waives privilege.

Can a lawyer disclose factual information without breaching LPP?

LPP applies primarily to communications rather than information. 

A client may therefore be aware of information, such as a description of transactions to be undertaken, that is not privileged.

However, if a lawyer is made aware of that information solely through a privileged communication from their client, the information becomes privileged in the lawyer’s hands.

They cannot be compelled to disclose it, even if the same information is not privileged in the hands of the client. (The client may have their own disclosure obligations under DAC 6 in respect of such information: see Can lawyers communicate with their own client about DAC 6? below.)

Even if the factual information comes into the lawyer's hands in non-privileged circumstances, by disclosing that information in the context of DAC 6 they’re likely to be disclosing that they have given advice in respect of an arrangement that is subject to a hallmark. 

Again, this would reveal the thrust of privileged communications between the lawyer and their client and would be a breach of LPP. 

This does not necessarily mean that the lawyer could resist a direct request for non-privileged information by HMRC under its general information gathering powers. 

What about reporting partially, such as the name of the client or other intermediaries?

Much of the reportable information under DAC 6 is likely to be privileged in any context. However, lawyers may receive unprivileged information in the course of acting for a client. 

For example, a lawyer may receive information about an arrangement from someone other than the client, such as an accountancy firm that’s not the client or an agent for the client. Or, in a particular case, a client’s name might not be privileged under general principles.

However, a partial report under DAC 6 consisting of the name of a lawyer’s client only may still tend to reveal the nature (and possibly the conclusion) of the lawyer’s advice.

Similarly, a partial report consisting of any other reportable information without the client’s details may, through operation of the DAC 6 rules as a whole, reveal that the lawyer had advised a specific client in relation to a reportable cross-border arrangement. 

In the context of DAC 6, a report of information that would not itself be privileged in a different context may therefore still result in a lawyer revealing privileged information about the nature of advice they gave and the substance of privileged communications.

Where that is the case, we consider that LPP prevents the lawyer from reporting the information under DAC 6. We expect the effect of this will be that in most cases, LPP will not allow lawyers even to make a partial report under DAC 6.

Are there circumstances when a lawyer will need to report?

Lawyers will need to ensure on a case-by-case basis that both LPP and the DAC 6 rules are respected.

There may be circumstances where a lawyer needs to report under DAC 6. For example, if they were to develop and market arrangements to potential clients that constitute reportable cross-border arrangements, information about their structure is not obtained or created in the course of providing legal advice to those clients.

Such information would not be privileged, so it may be reportable under DAC 6. You should also note your professional duties and be careful to avoid conflicts in relation to any such activities.

Does the form of the report make a difference?

We expect DAC 6 reports will have to be made electronically to HMRC. The form in which a disclosure takes place is immaterial to the LPP analysis. LPP is not limited to protecting disclosure of actual documents or copies of them, nor to protecting the actual advice. It can extend to facts or information (see above).

Could LPP prevent a lawyer from notifying other intermediaries or the ‘relevant taxpayer’ that an arrangement is reportable?

Regulation 7(2) requires lawyers who are prevented from making a disclosure of arrangements on the ground of LPP to notify other intermediaries. If there is none they should notify the relevant taxpayer as soon as reasonably practicable of the DAC 6 reporting obligations. 

However, this provision is also subject to Regulation 7(1) which protects LPP and prevents disclosure of privileged information.

In most cases, our view is that a lawyer is prevented by LPP from making a notification to another intermediary. That is because we consider notifying another intermediary that an arrangement is disclosable will in many cases disclose a key piece of confidential legal advice in the DAC 6 context because it reveals the lawyer’s judgement that DAC 6 applies. 

That judgement may also be based on privileged communications that enabled the lawyers to conclude that DAC 6 applies, although this might not be the case if, for example, the other intermediary worked for the same client and the DAC 6 issues had been generally discussed between the client, the lawyer and the other intermediary.

A similar analysis would apply to a notification to a relevant taxpayer who is not the lawyer’s client.

Can lawyers communicate with their own client about DAC 6?

Yes, LPP belongs to the client and not the lawyer, so lawyers can (and in most cases likely should) communicate with their client where they consider arrangements may be reportable under DAC 6. If their client is the relevant taxpayer for the purpose of DAC 6, the lawyers may also be under an obligation to notify their client under Regulation 7(2) and such a notification would not breach LPP.

Could LPP prevent lawyers from providing evidence to satisfy the ‘lack of knowledge’ defence? 

‘Service provider’ intermediaries (defined in the second paragraph of the DAC 6 definition of intermediary) do not have to report under DAC 6 if they provide evidence to demonstrate that they did not know (and could not reasonably be expected to know) that they were involved in a cross-border reportable arrangement. To the extent such evidence is privileged, a lawyer will not be able to provide it without client consent.

Could LPP prevent lawyers from providing evidence to satisfy the defences relating to arrangements already reported?

Regulation 3(2) provides an exception to the obligation on intermediaries to report under DAC 6 in certain scenarios where the intermediary has evidence that the reportable information required to be reported by the intermediary in relation to the reportable cross-border arrangement has been filed or returned in another jurisdiction or by another intermediary.

The evidence required is set out in Regulation 10 and includes the arrangement reference number.

HMRC has power under Regulation 11 to require information from a person reasonably suspected of being a UK intermediary in order to determine whether or not the obligations arising under these Regulations have been complied with.  Lawyers would not be able to provide such information to the extent it would breach LPP to do so. 

Could disclosure of an arrangement reference number received from HMRC to another intermediary breach LPP?

If a lawyer makes a report to HMRC under DAC 6, HMRC should send them an arrangement reference number. They would then be required to pass that number to any person who they know (or should reasonably be expected to know) is an intermediary or relevant taxpayer in relation to that reportable cross-border arrangement.

The lawyer would only receive the reference number from HMRC if they make a report to HMRC under DAC 6, which they should only do if not prevented by LPP.

In that context, it might not breach LPP to notify other intermediaries or the relevant taxpayer of the number. Nonetheless, lawyers should consider this on a case-by-case basis to ensure that sharing the number would not inadvertently breach LPP.

Is it possible to waive LPP?

Clients can waive LPP, but lawyers cannot. This could be done at the start of the matter or at a later stage. Lawyers must uphold privilege until any unambiguous waiver has been expressly communicated to them by their client.

If it’s useful to have the client’s consent to waiver early on, that could be set out in the letter of engagement or in a separate letter dealing with the matter as a discrete issue. Both would remove the need to refer to the client each time the question of waiver arises.

However, it would be advisable to draw the client’s attention to any clause setting out consent to waiver and then obtain the client's express consent agreeing that clause. That would be the case if the consent to waiver were set out in the letter of engagement.