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Director loans in BTC

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Hi, here's the hypothetical situation:

- Company financial year ends in May
- Over the course of financial year the company paid £90,000 to director as a loan. Director paid interest to the company on the balance of the loan.
- In February director lent the company 15 bitcoins which were at the time worth £30,000 (£2,000 per BTC)
- By the end of FY BTC rate rose to £6,000, increasing the equivalent of the company's BTC debt to director to £90,000
- Hence by the end of FY directors loan account is zero (he owes 90,000 in GBP, company owes him 90,000 in BTC)
- Capital gains tax does not arise for director as bitcoins are never sold. 

End result: company profits decreased by £60,000; director received £60,000 with almost zero tax. Interest payments are excluded for simplicity.

Am I mistaken anywhere? 

 

Upd. Yes, I was mistaken. Profit does not decrease for the company as it will have BTC on its balance. However, by the end of FY the director has got 60K tax free. He has to pay the price though - and the price is the risk that bitcoin goes down. In that case he'll have to pay the price difference. Otherwise I have not yet seen a constructive version of why would any taxes arise in this setup. 

Replies (31)

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By Adam12345
08th Aug 2019 17:56

Yes!

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By thestudyman
08th Aug 2019 18:19

First you would need to ensure bitcoins are accounted for correctly. There is a bit of subjectivity into the area but general consensus is it would be treated as an intangible asset and not financial instruments like how you would with shares etc ..

Here are some links:

https://www.icas.com/technical-resources/accounting-for-crypto-currencies

https://www.grantthornton.global/en/insights/viewpoint/accounting-for-cr...

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Replying to thestudyman:
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By bpmd
08th Aug 2019 18:23

Of course. But that doesn't prevent the director from lending BTC to the company and keeping that debt denominated in BTC, does it?

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By thestudyman
08th Aug 2019 18:20

Duplicate

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By Adam12345
08th Aug 2019 18:43

If I loan you £100, and the £ strengthens you'll still owe me £100.

The loan value won't increase after the transfer of the bitcoin to the company. The company will benefit from the increase in value (or if they happen to fall in value, the company would have to stomach the loss).

Your double entry also seems to be off.

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Replying to Adam12345:
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By bpmd
08th Aug 2019 18:59

If I owe you 100 USD and report in GBP as base currency I have to convert the value of the loan to GBP at the rate on the day of reporting, correct? So, if USDGBP rate fluctuates, so will loan value. I presume it's the same with BTC.

Although I might be getting that - BTC will be on the company balance, and there will be a equal BTC denominated debt that compensates them, so change in BTC rate will not lead to profit or loss for the company.

Although director will still get £60K with zero tax, won't he?

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By Tax Dragon
08th Aug 2019 20:21

How does the director make 60k on Bitcoin without disposing of the Bitcoin?

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Replying to Tax Dragon:
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By bpmd
08th Aug 2019 20:35

Technically he doesn't make it. It's a bit like getting a company loan using BTC as collateral.

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Replying to bpmd:
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By Tax Dragon
08th Aug 2019 23:33

If I lend you 30k and you repay me 90, I've made 60k somewhere. If it's not on the Bitcoin then it's on the loan. One way is gain, the other way is income.

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Replying to Tax Dragon:
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By bpmd
09th Aug 2019 01:20

You do not lend me 30K, you lend me an asset, and I'm required to pay you the same asset back regardless of its price. At time of payment its GBP price may be higher or lower, and I bear the risk.

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By bpmd
08th Aug 2019 20:38

And if the BTC rate goes down, he will have to repay the loan accordingly. However, as of end of year I believe he has 60K tax free.

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Replying to bpmd:
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By Adam12345
08th Aug 2019 22:27

No, he will still have 3 bitcoins he loaned to the company. If the company repays the ‘loan’ in cash, then it’s a disposal of the Bitcoin and taxed as such.

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Replying to Adam12345:
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By bpmd
09th Aug 2019 01:20

The company does not repay the loan in cash. It will have, in future, repay it in BTC. No bitcoin is sold, the amount of bitcoin returned will be equal to the number originally lent.

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Replying to bpmd:
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By Tax Dragon
09th Aug 2019 06:18

My mistake. You had converted to sterling therefore I assumed you were repaying in sterling.

If you're just lending and returning an asset, on what basis are you revaluing that asset when it is returned? And on what basis are you restating the base cost? The asset is always the director's- it's not a disposal, it's a loan.

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Replying to Tax Dragon:
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By bpmd
09th Aug 2019 13:53

Because I can't show the loan in BTC on a balance sheet, it has to be shown in GBP, so at the current BTCGBP value. The company may need to buy BTC in order to return them to director, and that will have to be done at market price.

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Psycho
By Wilson Philips
09th Aug 2019 09:26

I think you’re overlooking two points.

What happens to the “debit side” of the DLA when the Bitcoins are returned to the director?

More importantly, if he has only loaned the Bitcoins to the company then the original advance to him has not been repaid. I’ll need to refresh my memory on offsets.

Follow up: having checked legislation and HMRC guidance (which, admittedly, is not wholly reliable) I would suggest that the loan to director is exposed to BIK and section 455 charges.

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Replying to Wilson Philips:
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By bpmd
09th Aug 2019 14:03

I will be grateful for specific links showing that the director's loan would be subject to Section 455 charges. There will be no BIK as director would pay interest on the loan (or are you saying interest has to be paid just on monetary part? ok then).

Regarding accounting records I would create a separate account say "Directors loan BTC" which would change its value following the BTC rate, similar to what happens with foreign currency accounts. When BTC loan is repaid, it will go back to zero.

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Replying to bpmd:
Psycho
By Wilson Philips
09th Aug 2019 14:24

OK - I'll take a step back. Is the hypothetical director also a hypothetical shareholder? And is the hypothetical company a hypothetical close company?

In any event, though, when the Bitcoins are repaid to the director he will be left in the position of still owing the company £90,000. So after all of this, I'm not sure what point you are trying to make.

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Replying to Wilson Philips:
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By Bobbo
09th Aug 2019 14:33

This is what I was trying to understand. When the company 'repays' the bitcoins at whatever value they may be at, the director will still owe the company £90,000 so what exactly is the purpose of the whole arrangement??

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Replying to Bobbo:
Psycho
By Wilson Philips
09th Aug 2019 14:35

Why are you asking us? Why not ask the hypothetical promoter of the hypothetical arrangements?

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Replying to Wilson Philips:
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By bpmd
09th Aug 2019 14:33

Wilson Philips wrote:

OK - I'll take a step back. Is the hypothetical director also a hypothetical shareholder? And is the hypothetical company a hypothetical close company?

Let's say yes and yes

In any event, though, when the Bitcoins are repaid to the director he will be left in the position of still owing the company £90,000. So after all of this, I'm not sure what point you are trying to make.

I am only looking at the status as of end of the financial year. Different scenarios are available in the following year, and I am just not covering them here.

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Replying to bpmd:
Psycho
By Wilson Philips
09th Aug 2019 14:39

At the end of the financial year the director has borrowed £90,000 from the company and the company has borrowed the equivalent of £90,000 from the director. There are no particualr tax implications from that - the implciations arise from what happened before that date and what happens (or doesn't happen) after that date. But you say that you're interested only in the position as at 31 May so there's nothing much to add.

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Replying to Wilson Philips:
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By bpmd
09th Aug 2019 14:44

So if nothing happens - nobody repays any loans, and BTC rate is stable - do you still think section 455 charge will be due?

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Replying to bpmd:
Psycho
By Wilson Philips
09th Aug 2019 14:46

Answer my questions (posed at 14.24) and I'll give you my thoughts.

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Replying to Wilson Philips:
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By bpmd
09th Aug 2019 14:51

I've answered them above - let's say director is also a shareholder, and it's a close company.

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Replying to bpmd:
Psycho
By Wilson Philips
09th Aug 2019 14:57

In which case I would say that if the £90,000 loan from the company is not repaid within 9 months then a s455 charge is due. Lending money to the company, in Bitcoin, Sterling or any other currency, is not repayment.

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Replying to Wilson Philips:
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By bpmd
09th Aug 2019 15:05

I believe S455 is payable on the balance of the Directors loan account, which as of ear end in my opinion would be £90K minus BTC loan value = 0. Why do you think BTC loan should be disregarded? You mentioned you reviewed the legislation and guidance, so any specific links helping to answer this question will be appreciated.

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Replying to bpmd:
Psycho
By Wilson Philips
09th Aug 2019 15:16

s455 makes no reference to the balance of a director's loan account. It is payable on, amongst other things, an advance to the shareholder not repaid. s455 can be avoided if the loan is repaid in time, but lending money to someone is not repaying the debt.

What you are trying to do is net off the two balances and treat the whole thing as a single loan. HMRC might be willing to accept that treatment but in view of their comments at CTM61565 I'd be very doubtful. Especially since you've already indicated that you would keep separate nominal ledger accounts (for the avoidance of doubt, I don't believe that using a single account would offer much safety).

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Replying to Wilson Philips:
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By bpmd
09th Aug 2019 15:24

That's very relevant and helpful, thank you very much. So quoting CTM61565 "A credit balance can be used to repay a debit balance (provided that relevant book entries are made), but this is not the same as saying the two accounts can be “netted off”. "

This means there's no clear yes or no answer, and the company will have to prove its case that two opposite loan accounts can be netted off. In the worst case scenario the company will have to pay S455 tax recoverable once director's loan is repaid.

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Replying to bpmd:
Psycho
By Wilson Philips
09th Aug 2019 15:55

The point is that in making the relevant book entries when using a credit balance to repay a debit balance, both debts are cleared. The director no longer owes anything to the company and the company no longer owes anything to the director and, in this case, the Bitcoins would now belong to the company (with a corresponding chargeable gain on disposal by the director).

Otherwise, yes, I agree that the company may need to argue the position with HMRC.

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Replying to bpmd:
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By Tax Dragon
09th Aug 2019 17:16

bpmd wrote:

This means there's no clear yes or no answer.

You're the only one not seeing clearly, I would politely suggest.

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