UK CRYPTO TAX

UK Crypto Tax

UK CRYPTO TAXWhile a thorough crypto regulatory framework is yet to emerge in the UK, Her Majesty’s Revenue and Customs (HMRC) has already published the Cryptoassets Manual, where all the crypto-related tax liabilities are explained within the structure of the existing legislation. If you’re seeking to understand how your crypto activities might be taxed in the UK, keep the main principle in mind – HMRC taxes cryptoassets based on what the holder uses them for.

The manual is based on two policy papers – Cryptoassets: Tax for Individuals and Cryptoassets: Tax for Businesses, published in December 2018 and November 2019 respectively. According to these papers, cryptoassets (aka tokens, cryptocurrency) are cryptographically secured digital representations of value or contractual rights that can be transferred, stored and traded electronically.

The main types of taxable cryptoassets are:

  • Exchange tokens (used as a means of payment and as an investment)
  • Utility tokens (available only within a particular DLT ecosystem, where their holder can exchange them for products or services as well as trade them)
  • Security tokens (grant particular rights or interests in a business, e.g. ownership, repayment of a specific sum of money, or entitlement to a share in future profits)
  • Stablecoins (pegged to something that is considered to have a stable value such as fiat money or precious metals which makes them less volatile)

All liable crypto businesses have to adhere to the existing deadlines and time frames, such as the tax year which runs from the 6th of April until the 5th of April of the following year. Each year the taxes are determined based on the persons involved in the business and are dependent on the nature of their activities as well as such figures as income, profit and costs.

Based on the legal business structure, cryptoasset companies might be subject to paying the following taxes:

  • Corporation Tax (CT) – 19%
  • Digital Services Tax (DST) – 2%
  • National Insurance Contributions (NIC) – rates vary depending on employee’s earnings
  • Value Added Tax (VAT) – 20%
  • Stamp Duty (SD) – 0,5%

 

When clarifying tax treatment, the Cryptoassets Manual mostly focuses on the businesses engaging in activities that involve exchange tokens (e.g. Bitcoin). Such activities include:

  • Buying and selling exchange tokens
  • Exchanging tokens for other assets (including other types of cryptoassets)
  • Crypto mining
  • Supplying products or services in return for exchange tokens

Corporation Tax

 

Corporation Tax is levied on a company’s profits and gains. To calculate the tax correctly, it’s imperative to record every single exchange token transaction that’s been carried out – just like for any other type of asset.

 

Cryptoassets aren’t considered as currency or money and are therefore taxed as traditional assets. Furthermore, it means that the following money-related Corporate Tax legislation doesn’t apply to cryptoassets, including exchange tokens:

  • The foreign currency rules
  • The Disregard Regulations relating to exchange gains and losses
  • Designated currency elections

 

If an activity related to exchange tokens isn’t a trading activity and isn’t subject to the Corporation Tax in another way (e.g. the non-trading loan relationship or intangible fixed asset rules) then it’s considered the disposal of a capital asset and any gain that arises from the disposal would normally be subject to the Corporation Tax as a chargeable gain. Moving tokens between public addresses (wallets) that the company beneficially controls isn’t considered a disposal.

 

Exchange tokes are considered as chargeable assets for the Corporation Tax if they can be owned and have a value that can be realised. To find out whether a crypto company is obligated to pay the Corporation Tax on its chargeable assets, the gain or loss must be calculated after the disposal of the exchange tokens.

 

All gains are to be reported to HMRC at the time of filing the Company Tax Return form. Also, just like any other business, every crypto company can claim allowances and reliefs which will impact the final amount of the Corporation Tax.

 

The following business costs are deductible:

  • The amount originally paid for the asset
  • Transaction fees paid for having the transaction included on the distributed ledger
  • Advertising for a purchaser or a vendor
  • Professional costs to prepare a contract for the acquisition or disposal of the tokens
  • Costs of making a valuation or apportionment to be able to calculate gains or losses

 

Digital Services Tax

 

Digital Services Tax is paid on the revenues that are sourced from the UK users of certain digital activities. An online marketplace for selling products or services is one of the three digital services activities defined for the purposes of the Digital Service Tax. A crypto exchange falls within this category and is therefore subject to the tax.

 

According to the Digital Service Tax Manual, an online marketplace definition consists of the following parts:

  • The service enables users to advertise and/or sell particular products or services to other users
  • The main purpose, or one of the main purposes, of the service is to facilitate the sale by users of particular products or services

 

The sale doesn’t necessarily have to be concluded on or through the exchange. The exchange can merely facilitate advertising or enable the sale to take place.

 

An exemption from the definition of online marketplace is applicable when more than a half of the marketplace revenue during the financial year is sourced in connection with the facilitation of the trading of financial instruments, commodities or foreign exchange. Since cryptoassets don’t fall within any of these categories, it’s unlikely that cryptoasset businesses will be exempt from the tax.

 

Value Added Tax

 

Any products or services sold in exchange for the exchange tokens are subject to VAT under the regular VAT rules. The taxable value of the provided services or products is expressed in the pound sterling value of the exchange tokens at the time the transaction happens.  However, when cryptocurrencies are exchanged for products and services, the supply of the cryptocurrency itself won’t be subject to VAT.

 

Cryptocurrencies received by miners for their exchange token mining activities will generally be outside the scope of VAT because the activity doesn’t constitute an economic activity for VAT purposes due to an insufficient link between any services provided and due to the absence of customers for the mining service.

 

Charges made over and above the value of the exchange tokens for arranging any transactions in exchange tokens are exempt from VAT, provided that the service provider qualifies as an intermediary.

 

A supply of any services required to exchange the exchange tokens for fiat money or other exchange tokens and vice versa are exempt from VAT.

 

Venture Capital Schemes

 

Cryptoasset companies can seek tax-advantaged investment status under the venture capital schemes, provided that they (including investors and proposed investment) meet the prerequisite requirements, specific to each scheme. Currently crypto-specific conditions aren’t stipulated which means all cryptoasset companies  are treated as any other business.

 

The key qualifying condition of the venture capital schemes is that a company’s core activity must be a qualifying trade which is conducted on a commercial basis with a view to the realisation of profits and which isn’t an excluded activity. Companies trying to determine whether they are eligible can seek HMRC’s opinion via the advance assurance service.

 

If you’re planning to launch a cryptoasset company in the UK, our experienced and dynamic team of Regulated United Europe (RUE) is here to help. We offer comprehensive advice on crypto company formation, crypto licence, accounting and taxation and guarantee efficiency, confidentiality as well as meticulous attention to every detail that impacts your business success. Contact us now to receive a personalised offer.

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