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HMRC exploring bitcoin VAT treatment

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24th Jan 2014
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HMRC is examining the scope for bringing trading in virtual currencies such as bitcoins into line with the VAT treatment for normal currencies.

The department said it has held “constructive meetings” with stakeholders about the VAT treatment of virtual currencies and is expected to publish guidance shortly.

“This is a new and complex issue, and we are considering the arguments for alternative VAT treatments,” a spokesperson said.

“Most assets are liable to capital gains tax when sold or disposed of. This includes gains when disposing of non-sterling currency, other than foreign currency bought for personal use outside the UK.” 

Bitcoin has become increasingly popular in the past year or so, with demand driving a surge in value to around $900 since November.

Bitcoin’s tax status is already causing practical problems for practitioners doing self assessment returns. In the Sage Taxation self assessment surgery this week one adviser whose client made several thousand pounds on the sale of bitcoins sought Rebecca Benneyworth’s advice about the transaction.

“I'd like to enter this as a capital gain, effectively treating it as a currency gain. This would have the advantage of being covered by his annual exemption,” the questioner posted. “I am concerned that HMRC will say that my client is trading, even though there has only been one transaction so far.”

In this instance Benneyworth advised that the nature of the currency was less important than the client’s normal activities and badges of trade which would help the adviser establish whether it was a capital or trading transaction.

“Although trading treatment is unusual where there has been only one disposal in the period, it can happen," she wrote back. "You might want to think about when and how he acquired them.” 

Bitcoin and other virtual currencies are currently classed as vouchers for tax purposes, but HMRC is now examining alternative treatments as it cannot be a classed as a voucher due to its fluctuating value.

There has also been some backlash from bitcoin traders about the current level of VAT charged.

According to the Financial Times, HMRC is considering a similar approach to Germany, where has been classified as private money. This would limit VAT on transactions to only the commission charged by trading exchanges.

But first, the Revenue needs to evaluate - what is bitcoin, if not legal tender and not a voucher, said Gabelle VAT consultant Kevin Hall.

“HMRC is saying they would like to treat it as a currency but it is not legal tender. It is not issued by a recognised country,” he said.

Hall speculated whether HMRC would need to change EU law to apply such a VAT treatment to the currency, or whether it could take advantage of existing EU regulations.

“The legislation at European level states that transactions or negotiations concerning legal tender are a supply for VAT purposes. However, this supply is not the same as handing over legal tender in payment for a service or goods.

“There isn’t a law I’m aware of that says if I give a £10 note to someone to buy some goods, VAT should be charged on that £10 note. The question is whether the money used for payment must be legal tender, or whether bitcoins could be classified as money alongside legal tender without any further change to EU VAT law.  I wonder whether HMRC will go down that line.”

But head of tax at TMF Group, Richard Asquith, speculated that HMRC may apply a similar tax treatment to the virtual currency to that of gold, which is VAT exempt since 2000 under a special law at European level.

“I expect they will treat it like gold. This is VAT exempt as the VAT on the sale of gold was so inconsistent by different tax authorities that it distorted the market due to offshore trades.

"HMRC has been seeking legal advice on the issue and could announce something in February," he said.

He added that deciding on a definitive tax treatment of bitcoin may encourage more businesses to use it.

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