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Crypto Tax Update: HMRC Publishes Guidance on the Taxation of Cryptoassets for Businesses

  • United Kingdom
  • Tax planning and consultancy

02-12-2019

 

Summary

On 1 November HMRC published its much anticipated guidance on the taxation of cryptoassets for businesses.

The guidance sets out HMRC’s view on the taxation of transactions involving cryptoasset exchange tokens (such as Bitcoin) that are undertaken by companies and other businesses (including sole traders and partnerships). Future guidance will deal with the tax treatment of security tokens and utility tokens.

It is consistent with the equivalent guidance HMRC have provided to individuals in December 2018 – see further our previous briefing on Taxation of Cryptoassets for Individuals.

Fundamentally HMRC have reinforced their view that cryptoasset exchange tokens are not money and, due to evolving nature of the sector, they will take a facts based approach in relation to each case (ignoring any labels) to determine the correct tax treatment.

Depending on the nature of the transaction and business, there could be corporation tax, chargeable gains tax, income tax, national insurance contributions, stamp tax and VAT points to consider.

HMRC have helpfully provided new and additional guidance specifically relevant to companies and other businesses which is welcome.

Key points to note

1. Guidance relates to exchange tokens only

HMRC’s guidance only deals with cryptoassests which are exchange tokens. HMRC make clear that they will be separately addressing the tax treatment of security tokens and utility tokens in the future.

It is not surprising that HMRC have focussed on exchange tokens which are often seen as the paradigm of 'cryptocurrencies', these refer to Bitcoin, Litecoin and equivalents. They utilise a distributed ledger technology platform and are not issued or backed by a central bank or other central body. They do not provide the types of rights or access provided by security tokens or utility tokens but are used as a means of exchange or for investment and enable the buying and selling of goods and services.

2. Not money or currency

Consistent with their previously stated position, HMRC make clear that they do not consider exchange tokens to be money or currency. The rest of HMRC’s guidance flows from this position.

This helpfully means that businesses have certainty that specific corporation tax legislation relating solely to money or currency such as the foreign currency rules, exchange gains and losses regulations and designated currency elections are not relevant to exchange tokens.

3. Is there trading?

The guidance reiterates that in order to determine whether a business is undertaking trading activity in respect of exchange tokens, the usual factors (and case law) should be considered including: degree and frequency of activity, level of organisation and intention.

If the activities relating to exchange tokens amount to a trade, then the receipts and expenses will form part of the calculation of the taxable trading profit for income tax or corporation tax purposes (as applicable).

HMRC make clear that if the activities relating to the exchange tokens do not amount to a trade (and assuming in the case of companies that the relevant activity is not subject to corporation tax in any other way such as through the non-trading loan relationship or intangible fixed asset rules) then the activities will be treated as the disposal of a capital asset for chargeable gains purposes.

This is consistent with the position HMRC set out in their guidance for individuals where they clarified that the buying and selling of cryptoassets would not be treated as non-taxable gambling activity.

The guidance goes into more detail as to the relevant points to consider, depending on whether a business is trading or investing, for the purposes of calculating profits, gains and losses and the tax treatment of certain events such as forks (where the community which controls the exchange token want to do something different which may or may not result in the creation of a new branch in the blockchain and therefore a new type of cryptoasset) and airdrops (when someone receives an allocation of tokens or other cryptoassets, for example, when tokens are given as part of a market campaign).

4. Should not be a loan relationship but what about securities/collateral?

A company has a loan relationship for corporation tax purposes if it has a money debt that has arisen from a transaction for the lending of money. This will apply where a company has lent or borrowed money and the rules give rise to taxable credits and allowable debits for the relevant lenders and borrowers.

On the basis that HMRC do not consider exchange tokens to be money, the loan relationship rules should not apply to most activities involving exchange tokens. This means that if exchange tokens are loaned (in place of traditional currency), there should be no loan relationship.

However companies which have sought to borrow money using valuable exchange tokens as security/collateral in respect of an ordinary loan of money should note that a traditional loan relationship will exist and the loan relationship rules will apply in the usual way.

5. VAT

HMRC have taken the opportunity to re-state their position on VAT as set out in Revenue and Customs Brief 9 (2014): Bitcoin and other cryptocurrencies.

Broadly speaking, businesses and companies should note that:

a. VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens;

b. the value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place;

c. when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself; and

d. exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT.

HMRC have reiterated that a supply of any services required to exchange cryptoasset exchange tokens for legal tender (or other exchange tokens) and vice versa will be exempt from VAT.

6. Tax reliefs/advance assurance/non-statutory clearance

The guidance highlights that there are a range of tax reliefs which may be available for those cryptoasset businesses engaging in exchange token activities provided that the relevant qualifying conditions are met, including:

 

  • a. the enterprise investment scheme;
  • b. seed enterprise investment scheme;
  • c. venture capital trust scheme;
  • d. reliefs for gifts of business assets; and
  • e. business property relief.

 

Although there are no provisions within the legislation for these reliefs that refer to cryptoassests or cryptoasset activities in particular, HMRC’s view is that this in itself does not prevent such reliefs being available.

Businesses wishing to obtain the benefit of these reliefs will need to consider whether, based on their facts, the relevant conditions for relief are met.

HMRC acknowledge that given the novel and evolving nature of cryptoasset sector there are likely to be a number of areas of uncertainty regarding the application of the relevant legislation.

As such they fully expect early-stage companies which depend on tax-geared investments (e.g. via the venture capital trust scheme) to apply for non-statutory advance assurances to have the upfront comfort that such companies and their investors need that they qualify for the relevant scheme and its associated tax benefits.

We have seen cryptoasset companies take advantage of HMRC’s non-statutory advance assurances and non-statutory clearance services. In addition to helping businesses have the comfort they need on the application of particular reliefs and schemes, this is also helping HMRC understand and adapt to the cryptoasset sector.

7. Employment taxes

If an employer uses exchange tokens to pay earnings to an employee, those exchange tokens will be counted as being ‘money’s worth’ and therefore subject income tax and national insurance contributions (NICs).

Whether employers will be required to account to HMRC via Pay As You Earn (PAYE) will depend on whether the exchange tokens are considered readily convertible assets (exchange tokens will be considered readily convertible assets if trading arrangements exist or are likely to come into existence (e.g. Bitcoins can be exchanged on token exchanges in order to obtain an amount of money)).

If the exchange token is not a readily convertible asset then the employer does not need to account to HMRC via PAYE, but an obligation will apply to the employee to declare and account to HMRC via self-assessment and the employer should treat the payment as a benefit in kind and pay Class 1A NICs. Therefore, from a practical perspective employers may wish to inform employees in situations where they consider the exchange tokens to not be readily convertible assets.

8. Stamp taxes

HMRC’s current position is that transfers of exchange tokens are unlikely to fall within the scope of stamp duty or stamp duty reserve tax because they are unlikely to meet the definition of ‘stock or marketable securities’ or ‘chargeable securities’. Nevertheless HMRC make clear that this would need to be considered on a case-by-case basis by looking at the characteristics and nature of the exchange token in question rather than any label given to them.

Unsurprisingly, HMRC does not consider exchange tokens to be ‘land transactions’ for the purpose of stamp duty land tax and therefore stamp duty land tax will not be payable on the transfer of exchange tokens.

It is important to note that where exchange tokens are given as consideration for: (i) chargeable securities such as shares or (ii) land transactions, these exchanges tokens will be treated as chargeable consideration in the form of ‘money’s worth’ and as such these transactions will trigger stamp duty reserve tax or stamp duty land tax as applicable. Exchange tokens will not be treated as chargeable consideration for stamp duty because they are not treated as money and there is no ‘money’s worth’ concept for stamp duty purposes.

Where exchange tokens are treated as chargeable consideration, the relevant stamp tax will be due based on the pound sterling value of the exchange tokens.

9. Final thoughts and next steps

HMRC’s guidance is helpful in confirming that they are taking a consistent approach to the taxation of cryptoassets for businesses and individuals.

Given the evolving nature of the crytoasset sector, businesses and HMRC will need to consider the application of the relevant tax legislation on a case-by-case basis having regard to the particular facts at hand.

Although the guidance helpfully gives some comfort on the issues and practical points faced by such businesses it is clear that this is a sector where the legislation and guidance has not caught up with how these businesses operate in practice.

In our experience, we find that HMRC have adopted a co-operative and helpful approach to addressing uncertainties faced by businesses and investors through the non-statutory advance assurance and clearance processes. This is mutually beneficially and is hopefully helping to shape HMRC’s future policy and guidance on the taxation of cryptoassets.

The current guidance relates only to exchange tokens. Businesses and other market participants are hoping that HMRC’s guidance in respect of transactions involving security and utility tokens will help settle some of the areas of uncertainty still faced by them.

For further detail on the guidance please read it in full here: Cryptoassets: tax for businesses.

If you are interested in the IRS’ recent cryptocurrency guidance please see our US tax team’s recent Legal Alert: IRS provides long awaited cryptocurrency guidance.

For more information contact

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