Cryptocurrency Regulation in the UK

Crypto Regulation in th UKThe UK regulatory framework for cryptoassets is partially aligned with the EU as the country adopted the AML/CFT requirements laid out in the EU 5th Anti-Money Laundering Directive (5AMLD) and the 6th Anti-Money Laundering Directive (6AMLD) prior to leaving the organisation. However, the UK’s national legislation is at an infancy stage as the government has only recently announced its plans to build an infrastructure that should turn the country into a global hub for crypto technologies and investment.

All companies planning to carry out cryptoasset activities in the UK must register with the Financial Conduct Authority (FCA) in order to obtain Part 4A Permission authorisation (aka crypto licence in the UK). The FCA is a supervising authority who enforces already existing AML/CFT regulations as well as spearheads a dialogue among the regulatory bodies and market participants. One of such initiatives is a two-day collaborative event CryptoSprint where, in essence, regulators meet with the innovators to discuss and partner on crypto policy developments.

The FCA defines cryptoassets as secured digital representations of value or contractual rights that use some type of distributed ledger technology (DLT) and can be transferred, stored or traded electronically. The regulator currently distinguishes two categories of cryptoassets – regulated tokens and unregulated tokens.

UK cryptocurrency regulation

Regulated tokens are as follows:

  • Security tokens amount to a Specified Investment under the Regulated Activities Order (RAO), excluding e-money; they may provide rights to participate in the business (e.g. ownership, repayment of a specific amount of money, or sharing future profits) and under the EU Markets in Financial Instruments Directive II (MiFID II), they may also be transferable securities or other financial instruments.
  • E-money tokens – as per the Electronic Money Regulations (EMRs) – are electronically (including magnetically) stored monetary values, represented by a claim on the issuer, which is issued on receipt of funds for making payment transactions.
  • Stablecoins – cryptocurrencies that are pegged to the value of fiat currency or precious metals with the aim to reduce their volatility; they’re the latest type of cryptoassets to come under the regulatory framework which will allow for them to be used as a valid form of payment and widen consumer choice.

According to the FCA, the following tokens are unregulated:

  • Utility tokens (allowing to gain access to goods or services on a certain DLT platform)
  • Crypto exchange tokens (cryptocurrencies used as a means of payment and can be an object of investment pertaining to an increase in their value)

The FCA offers support through the Innovation Hub to those crypto companies who’re looking to launch crypto products and services in the UK and are in need of learning about the applicable legislation.

Newly authorised businesses (crypto licensees) and crypto businesses focused on scaling innovative technologies are supported and supervised by the Early and High Growth Oversight initiative.

If a crypto company is prepared to test its innovations in the market, they can apply to the FCA’s Regulatory Sandbox.

The following regulatory projects are in the pipeline:

  • A new financial market infrastructure sandbox which will enable startups and established crypto businesses to innovate, experiment and test business models in a safe environment, within the regulatory framework.
  • Cryptoasset Engagement Group to be established and chaired by the Economic Secretary with the goal to facilitate a dialogue with the market participants and advise the government on the crypto industry development.
  • Building a competitive tax system for crypto businesses which will accelerate the development of the market.

Anti-Money Laundering and Counter-Terrorist Financing Legislation

UK-based cryptoasset companies must comply with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 which sets out obligations of private sector companies exposed to the risks of money laundering.

In order to be compliant, cryptoasset companies are obligated to:

  • Conduct AML/CFT risk assessment related to clients, country of operations, transactions, products and services
  • Implement applicable AML/CFT systems, policies, controls and procedures, including communication of all changes, which should be corresponding with the complexities of the business
  • Hire a qualified AML/CFT compliance officer who would be accountable for adhering to the applicable legislation
  • Provide training to staff responsible for implementing AML/CFT procedures and monitor their work
  • Continuously monitor transactions and be prepared to report suspicious transactions through Suspicious Activity Reports
  • Comply with KYC requirements and implement required policies through standardised workflows
  • Comply with requirements relating to identifying politically exposed persons
  • Design compliant record keeping and data protection systems and workflows that protect personal data but also ensure sufficiency of reporting records for AML/CFT purposes
  • Develop an internal audit function and continuously monitor its implementation

Obtaining a Crypto license in the UK

According to the AML/CFT legislation, cryptoasset companies planning to operate in the UK by providing products or services are legally required to register with the FCA who’s responsible for their authorisation and supervision with the focus on consumer protection, market integrity and fair competition.

The FCA makes a decision on complete applications within 6 months. If an application is incomplete, the decision is made within 12 months.

The department of Innovative Pathways can support the application process by explaining the complexities of the regulations, including the implications for cryptoasset business models.

Companies carrying out the following activities must apply for the authorisation:

  • Exchange from cryptocurrencies to fiat money and vice versa
  • Exchange from cryptocurrency to cryptocurrency
  • Crypto ATM operations
  • Provision of custodian wallet services
  • Facilitation of peer-to-peer exchange of crypto
  • Participation in Initial Coin Offerings (ICO)

Key requirements for becoming an authorised crypto business in the UK:

  • Registered company with a physical office (PO box isn’t allowed)
  • Bank accounts for operations and cryptocurrency transactions
  • Compliance with the AML requirements
  • Preparation of all required documents for obtaining a crypto license (such as business plan, risk management policies according to AML/CFT legislation)

The process of applying for the FCA AML/CTF cryptoasset authorisation:

  • An applicant settles an application fee
    • 2,000 GBP (if the company’s income is less than 250,000 GBP)
    • 10,000 GBP (if the company’s income is greater than 250,000 GBP)
  • An applicant submits a completed application form via Connect
  • The FCA assigns a case officer and starts assessing the application
  • The applicant provides any additional information or evidence as per the case officer’s request
  • The FCA checks the application against various databases and information held by other regulatory agencies in the UK or overseas
  • The FCA assesses the crypto business, considering whether it meets the minimum threshold conditions (which depend on the complexity of the business) described in the Handbook
  • The FCA makes a decision on the application and issues a Part 4A Permission if the application is successful
  • The FCA confirms the decision in writing, including a Scope of Permission which states what type of regulated activities are authorised, start date and limitations of the permission
  • Upon authorisation, the Financial Services Register will be updated automatically

Required documents:

  • Documentation about the directors and owners, including proof of their relevant experience, competences (e.g. CV) and impeccable reputation
  • Information about the shareholders
  • Business plan (including financial model, marketing plan, organisational structure)
  • Documentation of risk management procedures and policies relating to AML/CFT and all company’s departments that could be potentially exposed to security or integrity risks

Overall, the aim of the documentation is to ensure that an applicant complies with the AML/CFT legislation and will be able to successfully operate in the market.

An application can be withdrawn during the authorisation process in which case the application fee isn’t refunded. The applicants usually pull out when they’re unable to provide all the required information or due to missed legal deadlines.

If an application is rejected, the FCA will explain the reason for their decision and will refund the application fee. It’s possible to resubmit the application.

In addition to the authorisation application fee, authorised companies also have to pay a periodic fee which is calculated by applying a particular formula (involving application fee, company’s evaluation and calendar months) and communicated by the FCA in each individual case. In the first year authorised companies have to pay only a proportion of the fee (based on the number of months remaining in the fee-year).

How to Open a Crypto Company in the UK

Before applying for a crypto license in the UK, it’s mandatory to register a company in the UK. One of the most popular business structures in the UK is a Private Limited Company (Ltd). The advantages include protection of personal assets, tax planning and reductions and even enhanced professional image. A new company can be set up from abroad.

There are no requirements for a minimum share capital. A prerequisite for establishing a Private Limited Company in the UK is at least one shareholder and one director, who can be the same person and a non-resident of the UK.

Steps of opening a Private Limited Company:

  • Choosing a unique name that should include either Limited or Ltd
  • Choosing directors and a secretary
  • Choosing either shareholders or guarantors
  • Identifying people with significant control over the company (e.g. voting rights)
  • Preparing a memorandum of association and articles of association
  • Identifying the scope of company and accounting record keeping
  • Registering a company with Companies House (including registering an official address and obtaining a SIC code)
  • Registering a company with HMRC for Corporation Tax
  • Submitting an application for the FCA AML/CFT cryptoasset authorisation

Taxation of Cryptocurrency Companies in the UK

While the government is yet to build an effective and comprehensive regulatory framework for cryptoassets, crypto-related tax liabilities are already laid out in the Cryptoassets Manual, published in March 2021 by the UK tax authority Her Majesty’s Revenue and Customs (HMRC) in accordance with existing legislation. The manual describes in detail what records crypto businesses and individuals should keep and what taxes they might be subject to.

The content of this manual is based on the policy papers, titled Cryptoassets: Tax for Individuals and Cryptoassets: Tax for Businesses, which were published in December 2018 and November 2019 respectively.

If a company is conducting activities involving exchange tokens, it’s subject to paying taxes. Such activities include:

  • Trading exchange tokens
  • Exchanging tokens for other assets (including other types of cryptoassets)
  • Crypto mining
  • Providing products or services in return for exchange tokens

It’s important to note that the tax treatment of cryptoassets is contingent upon the fast evolving crypto industry and is therefore subject to improvements or change. Partially due to this reason, when it comes to paying taxes, every case is evaluated individually.

In the UK, tax year runs from the 6th of April until the 5th of April of the following 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.

Types of taxes crypto businesses might be liable to pay:

  • Corporation Tax (CT) – 19%
  • Digital Services Tax (DST) – 2%
  • National Insurance Contributions – rates vary depending on employee’s earnings
  • VAT – 20%

Just like businesses from other industries, crypto businesses must declare their income and expenditure to HMRC who will apply the relevant legislation and case law to decide what taxes should be paid.

Corporation Tax

Depending on the legal structure of the business, Corporation Tax can be levied on crypto company’s profits and gains and should be calculated based on all of the exchange token transactions that a company has carried out.

In order to find out whether a company has to pay a Corporation Tax, it’s necessary to calculate their gain/loss after the disposal of their tokens. A disposal includes:

  • Selling tokens for fiat money
  • Exchanging tokens for a different type of token
  • Using tokens to pay for products or services
  • Giving away tokens to another person

Moving tokens between public addresses (wallets) that the company beneficially controls isn’t considered a disposal.

HMRC doesn’t consider any of the current types of cryptoassets to be money or currency which means that money-related corporate tax legislation (such as foreign currency rules or the Disregard Regulations relating to exchange gains and losses) doesn’t apply to cryptoassets.

When gains/losses from the disposal of tokens are calculated, it’s important to remember that not all costs are allowable as a deduction.

The following costs can be deducted:

  • 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

Generally, costs for the mining equipment and electricity aren’t considered as costs allowable as a deduction.

If a company disposes of cryptocurrencies for less than their allowable costs, they will have a loss. Such allowable losses will impact the overall gain and they must be reported to HMRC.

Digital Services Tax

Online marketplace service for selling products or services is one of the three digital services activities defined for the purposes of the Digital Service Tax. An exchange which has a purpose of facilitating the sale of cryptocurrencies is subject to paying the tax.

An exemption from the definition of online marketplace applies when more than a half of the marketplace revenue during the financial year arises in connection with facilitating the trading of financial instruments, commodities or foreign exchange. However, since cryptoassets aren’t considered to be among any of these categories, it’s unlikely that cryptoasset businesses will be exempt from the tax.

VAT

Generally, the exchange of traditional currencies for cryptocurrencies and vice versa is exempt from VAT.

Furthermore, 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 any consideration and due to the absence of customers for the mining service.

When cryptocurrencies are exchanged for products and services, the supply of the cryptocurrency itself won’t be subject to VAT.

Corporate Reporting Requirements in the UK

UK-based companies must prepare financial statements in accordance with the financial reporting standards. Company and financial records must be kept for 6 years from the end of the last company financial year they relate to.

Generally, the majority of companies are required to undergo an audit. However, small businesses might be exempt, unless shareholders who own at least 10% of shares (by number or value) request it in writing by sending a letter to the company’s registered office address at least a month prior to the end of the financial year that the audit is being asked for. While it’s been made clear that e-money issuers of any size are obligated to have an audit, other crypto product and service providers should consult with the appropriate authorities.

Audit exemptions are also determined by a financial year. For instance, for financial years that begin on or after the 1st of January 2016 a company may qualify for an audit exemption if it meets at least 2 of the following criteria:

  • An annual turnover of no more than 10.2 mill. GBP
  • Assets worth no more than 5.1 mill. GBP
  • 50 or fewer employees

 

Our team of dedicated and efficient lawyers will be delighted to provide you with tailored support in registering with the FCA and in obtaining a crypto license in the UK. From the very start of the process you’ll be backed with the expertise in local legislation, company formation, reporting and tax advice.

Establish a Crypto Company in the UK

The UK has recently set the goal of becoming the most desired country to build and scale crypto businesses and is slowly transforming itself into a crypto-friendly place where innovation is encouraged through dynamic regulations. While all of it is in the pipeline, you can still realise your crypto business idea in one of the most competitive economies in the world.

The UK business environment boasts several advantages, to name a few:

  • The UK is ranked 8th out of 190 countries in the World Bank Ease of Doing Business Index 2019 which is a clear indication of the favourable conditions for businesses
  • The UK is ranked 11th out of 180 countries in the Corruption Perception Index 2021 which is an indication of being one of the most transparent and the least corrupt countries
  • The UK is ranked 24th out of 177 countries in the 2022 Index of Economic Freedom, the measures of which are judicial effectiveness, tax burden, regulatory efficiency, investment freedom, etc.
  • Attractive tax allowances and reliefs (e.g. double taxation agreements, R&D allowance, etc.)
  • Innovation-oriented regulations
  • Flexible labour legislation
  • London, the UK’s capital, is one of the global epicentres of financial services and entrepreneurship

The UK companies are generally governed by the Companies Act 2006 which covers corporate documentation, company formation and other corporate principles and processes. Other relevant pieces of corporate legislation are the UK Corporate Governance Code and the Insolvency Act 1986.

The public register of the UK companies is maintained by the Companies House. It includes such publicly available information as registered address, a list of current and past officers and images of corporate documents. The Companies House is also responsible for the incorporation, registration and insolvency of companies.

Since cryptocurrency businesses are partially regulated, you’ll possibly have to deal with the Financial Conduct Authority (FCA) whose main responsibility is to enforce AML/CFT regulations.

Types of Business Entities

You can choose from a variety of business structures, suitable to engage in fully authorised crypto activities. The most common and safest business structures include a Private Company Limited by Shares (Ltd), a Public Limited Company (Plc) and a Limited Liability Partnership (LLP).

All of them have one mutual characteristic – the financial liability of shareholders is limited to the value of their investment in the company.

Private Company Limited by Shares (Ltd)

One of the most frequently used business structures in the UK is a Private Company Limited by Shares (Ltd). The advantages include protection of personal assets, tax planning and reductions and even enhanced professional image and credibility. Shareholders are liable for the company’s obligations only to the extent of their investment.

Features of a Private Company Limited by Shares (Ltd):

  • No requirements for a minimum share capital
  • At least one shareholder (no residence requirements)
  • At least one director (who can be a shareholder)
  • It’s allowed to buy back shares
  • Directors can be paid in the form of salary and dividends which helps optimise taxes

Required documents:

  • A Memorandum of Association
  • Articles of Association
  • An application for registration
  • Proof of identity of all directors and shareholders
  • Proof of residential address of all directors and shareholders
  • Proof of registered office address

A financial audit is mandatory but small companies can be exempt if two of the below amounts aren’t exceeded:

  • An annual turnover – 10,2 mill. GBP (approx. 11,9 mill. EUR)
  • Total assets – 5,1 mill. GBP (approx. 5,9 mill. EUR)
  • The average number of employees – 50

However, shareholders who own at least 10% of shares (by number or value) can still request a financial audit in writing by sending a letter to the company’s registered office address at least a month prior to the end of the financial year that the audit is being asked for.

Public Limited Company (Plc)

This type of legal entity is chosen when there’s an intention to build a large-scale business. Shares of a Public Limited Company (Plc) can be listed on an exchange and sold to the general public in order to raise capital. The company can then use the funds to finance R&D and other projects, pay off debts or expand its activities.

Compared to any other limited company, a Public Limited Company (Plc) is subject to stricter regulations and scrutiny, especially if its shares are traded on a stock exchange. To ensure accountability and transparency, it’s imperative to implement thorough reporting procedures.

Essential features of a Public Limited Company (Plc):

  • The name must end either with the words Public Limited Company or their abbreviation Plc
  • Minimum share capital – 50,000 GBP (approx. 59,000 EUR), at least 25% of which must be paid up prior to the start of economic activities
  • At least two directors
  • At least one company secretary with suitable qualifications
  • It’s mandatory to invite shareholders to an Annual General Meeting (AGM) where the company’s accounts are presented along with the declaration of dividends
  • It’s not allowed to buy back its own shares out of capital or cash
  • It’s allowed to raise funds through loans and retained profits
  • A financial audit is mandatory and a qualified auditor must be hired for every financial year

Required documents:

  • A Memorandum of Association
  • Articles of Association
  • An application for registration
  • Proof of identity of all directors and shareholders
  • Proof of residential address of all directors and shareholders
  • Proof of registered office address

Limited Liability Partnership (LLP)

The structure of a Limited Liability Partnership (LLP) is normally chosen by those who prefer to keep their tax liabilities limited and separate and are looking for different levels of partnership with no capital requirements.

This type of business structure is governed by the Limited Liability Partnership Act 2000 and the Limited Liability Partnerships (Application of Companies Act 2006) Regulations 2009 instead of the Companies Act 2006.

Key features of a Limited Liability Partnership (LLP):

  • No share capital which is why capital-related laws don’t apply
  • No Memorandum of Association or Articles of Association
  • At least two members (no maximum number) who don’t have to be UK residents and both can be corporate
  • At least two designated members (corporate or individuals) at all times
  • Some or all of the partners must have limited liabilities
  • Partners can directly manage the business (instead of, for example having to elect a board of directors)
  • No rules for the internal governance structure
  • Accounting records must be duly maintained and annual accounts must be filed with the Companies House
  • All earned profits are distributed without the possibility to keep them for a future tax year
  • It isn’t liable for paying Corporation Tax
  • For tax purposes, members are separate meaning that each member is personally responsible for paying Personal Income Tax and National Insurance which are levied on their individual profits

Designated members are the equivalent of directors and have more responsibilities related to the management of the partnership compared to ordinary members. They’re obligated to ensure that the company and its members meet all legal requirements and obligations. Any member can be a designated member in accordance with the incorporation document.

Required documents:

  • A written agreement (incorporation document) between the members that includes operational principles, the ways of joining and leaving the partnership, and the distribution of profits
  • Identification documents of all members
  • Proof of registered office address
  • Non-objection certificate from the landlord

The incorporation document must include the following information:

  • The name of the partnership
  • Country (England, Wales, Scotland or Northern Ireland) and address of the registered office
  • Details of each member (identification, residential addresses, etc.)
  • Details of each designated member
  • A statement of initial significant control

Generally, a Limited Liability Partnership (LLP) requires a financial audit. It can be exempt if it meets at least two of the following conditions:

  • Annual turnover doesn’t exceed 10,2 mill. GBP (approx. 12 mill. EUR)
  • The balance sheet total doesn’t exceed 5.1 mill. GBP (approx. 6 mill. EUR)
  • The average number of employees is no more than 50

For AML/CFT purposes, crypto companies of any legal structure are required to submit an Annual Financial Crime Report via RegData within 60 business days of the company’s Accounting Reference Date (ARD).

What You Need to Do

Once all the legally required documentation is duly prepared, the registration can be completed within 24 hours. You can either register your company online or entrust us with the task.

To open an authorised cryptocurrency company in the UK, you have to take the following steps:

  • Choose a unique and compliant name
  • Prepare incorporation documents
  • Hire staff to meet minimum legal requirements
  • Identify and supply information about people with significant control over the company (e.g. voting rights)
  • Find and register a physical office in the UK (a PO Box Number won’t suffice)
  • Open a local corporate bank account
  • If relevant, transfer share capital to the new bank account
  • Design and document internal AML/CFT policies that are in line with the size and complexity of your crypto business
  • Identify the scope of company and accounting record-keeping
  • Register a company with Companies House
  • If you’re establishing a Public Limited Company (Plc), you must apply for a trading certificate at the Companies House proving that the initial share capital has been raised and the company can start its activities
  • Register a company with Her Majesty’s Revenue and Customs (HMRC) for Corporation Tax within three months from the registration
  • Submit an application to the FCA for AML/CFT cryptoasset authorisation

A crypto company can’t begin to operate in the UK without the FCA’s authorisation if it’s planning to engage in the following activities:

  • Exchange or arrange to exchange of cryptocurrencies for fiat money or vice versa, or one cryptocurrency for another cryptocurrency
  • Install and operate a machine (e.g. ATM) that uses automated processes to exchange fiat money for cryptocurrencies or vice versa
  • Provide custodian services for cryptocurrencies on behalf of customers or private cryptographic keys designed to hold, store and transfer cryptocurrencies

The authorisation process may take 6-12 months and cost 2,000 GBP (approx. 2,350 EUR) – 10,000 GBP (approx. 12,000 EUR). If you wish to dive deeper into the specifics of crypto authorisation in the UK and the prospects of your company, don’t hesitate to reach out to us – we’ll be delighted to offer a personalised consultation that will help you decide whether the UK is the right jurisdiction.

Taxation of Crypto Companies in the UK

Cryptocurrencies aren’t considered legal tender and are therefore taxed as traditional assets. One of the rare exceptions is VAT application which is when cryptocurrencies are treated as fiat money. Crypto companies are taxed depending on the purpose of their activities.

Crypto companies are liable for 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%

Our team of dedicated and quality-focused lawyers will be delighted to provide you with tailored, value-added support in establishing a fully authorised cryptocurrency company in the UK. From the very start of the process, you’ll be backed with expertise in company formation, swiftly evolving AML/CFT legislation and taxation. Contact us today to receive a personalised offer.

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