A recurring theme in taxation, both domestically and internationally, is the uncertainty which can arise when innovative, rapidly-developing technology is subjected to current legal frameworks, which inevitably 'lag behind the curve'. A good example of this is the problem posed by cryptocurrencies.
Simply put, cryptocurrencies are digital currencies that are decentralised, meaning that the blockchain technology they are built on and that validates them is designed to operate without the control of a central authority. Cryptocurrencies can generally be 'mined' by individuals (by solving cryptographic algorithms), traded with other currencies, used to purchase goods and services (where payment in this form is accepted), and (perhaps most controversially) can offer investment opportunities themselves.
Back in 2014, HMRC published a brief concerning the UK taxation of cryptocurrencies which primarily focussed on Bitcoin (Guidance). The Guidance offers some useful views on how HMRC considers that cryptocurrencies should be taxed, but it also acknowledges that cryptocurrencies are a "new and evolving area" and that the determination of "their legal and regulatory status is ongoing". The key implication here is that, as the nature and use of cryptocurrencies change, so will their tax treatment and HMRC will not be bound to any pre-set view as to the appropriate tax treatment which should, instead, be analysed on a case-by-case basis.
Corporation tax treatment
HMRC notes that, where businesses accept payment for goods or services in Bitcoin, there is no change to when revenue is recognised or how taxable profits are calculated.
As such, Bitcoin should be brought within the scope of corporation tax where it is received by a company in the course of trading activity. Similarly, Bitcoin should also be taxed where it is received in the course of investment activities, for instance, where a company disposes of property or investment stock in return for Bitcoin.
HMRC also notes that a company’s exchange gains will be taxable and losses deductible following the general rules on currencies and loan relationships. In brief, an exchange gain or loss can arise when the value of an asset or liability valued in one currency is compared with its value in another currency at two separate dates.
An example would be a company contracting to purchase a property for X Bitcoin on 1 January 2018, with payment due on 1 March 2018. If the exchange rate of sterling for Bitcoin is identical on those dates, no exchange gain or loss would arise – however, if Bitcoin falls in value against sterling during this time, the company will make an exchange gain which should be taxable (conversely a loss can also arise). In addition, a company may be taxed based on exchange movements determined in the company's accounts even if the Bitcoin is not actually disposed of.
This confers some clarity on the current position, but the Guidance also makes clear that any profits, chargeable gains or allowable losses will be assessed on a case-by-case basis taking into account the relevant facts and circumstances in existence at the time.
In the Guidance, HMRC acknowledges that the UK VAT treatment of cryptocurrencies must be consistent with that of the EU (while VAT is imposed in the UK through national legislation, it has been done so in compliance with the EU VAT Directive). This position could, of course, be subject to change after Brexit has been implemented.
HMRC notes that, in all instances, "VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrency". In addition, and importantly, HMRC notes that the value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place. However, this could give rise to commercial difficulties as the price of cryptocurrencies throughout the day tends to be much more volatile than, for instance, that of Sterling.
HMRC also confirms that:
- when Bitcoin is exchanged for Sterling or for foreign currencies, such as Euros or Dollars, no VAT will be due on the value of the Bitcoins themselves; and
- charges (in whatever form) made over and above the value of Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT.
Regarding HMRC's view on the latter exemption, this follows European case law which confirmed that the VAT exemption for "transactions, including negotiation, concerning currency, bank notes and coins used as legal tender" should apply to such charges.
Therefore, while VAT will likely be due on any supply of goods or services, VAT should not be due on any charges which cryptocurrency exchanges make in respect of dealing in cryptocurrencies (which should be exempt for VAT purposes).
It is fair to say that there is a degree of ambiguity concerning the tax treatment of cryptocurrencies. This is arguably because, while the existing legal framework will be applied to companies which transact in cryptocurrencies, there was no consideration of cryptocurrencies at the time the current laws were enacted. Even where HMRC posits views in the Guidance, it clearly holds to the position that the tax treatment will be considered on a case-by-case basis. As such, there is scope for HMRC to take a position which is different to that stated in the Guidance.