As Bitcoin and other cryptocurrencies gain prominence, more businesses are actively seeking out opportunities to create (“mine”) and trade them. But however appealing it may be, the expense and complexity of mining cryptocurrencies could scarcely be described as minor.
Adding to this complexity is the VAT aspect of cryptocurrency, which more businesses are having to consider too. As experts in decrypting VAT, here’s our view of the situation and how it could develop.
Where cryptocurrency is concerned, HMRC’s position on VAT is different from four years ago. In early 2014, an HMRC spokesperson said: “There is a VAT exemption for currency transactions but the currency in question must be legal tender.” At the time, HMRC treated Bitcoin not as legal tender but as a ‘taxable voucher’, with VAT charged on the value of the coin itself.
This drew protests from UK entrepreneurs, who were concerned it would make their businesses less competitive in the global marketplace. That in turn led HMRC to hold consultations.
In March 2014, HMRC published Revenue and Customs Brief 9 (2014) which superseded its previous guidance. Its current position is that the mining and trading of Bitcoin and other cryptocurrencies should be treated as being outside the scope of VAT.
This stance has since been reflected at an international level. In October 2015, the Court of Justice of the European Union (CJEU) ruled that ‘the exchange of traditional currencies for units of the Bitcoin virtual currency is exempt from VAT … under the provision concerning transactions relating to currency, bank notes and coins used as legal tender’ (Skatteverket v David Hedqvist).
Extent of exemption
If you’re a cryptocurrency “miner” then income you receive for other activities, such as the supply of services in connection with the cryptocurrency, is regarded as exempt income. For example, incomes received from verifying transactions of cryptocurrencies are regarded as financial transactions.
Bitcoin and other cryptocurrencies are not classed as legal tender at this time. But following their rise in status, the trading of all cryptocurrencies is treated in line with the trade of physical ‘fiat currencies’, such as the pound or the dollar. In addition to this, central banks around the world are beginning to consult on regulation of cryptocurrencies.
Therefore, any currency trade is exempt from VAT, as are the costs surrounding that trade. However, where payment is made by a cryptocurrency for goods or services, the normal VAT rules apply.
Virtual currency, real expenses
If your business is looking to mine or trade cryptocurrency, how might the VAT situation affect you?
The creation of high-value cryptocurrencies like Bitcoin seems attractive. Bitcoin began 2017 with a value of US$976.65 and ended the year at US$13,378.69, peaking at almost US$19,498.63 during 2017. This should not obscure the fact that the cost of mining Bitcoin from the outset is substantial.
The mining process is not something that can be done on a home computer in a spare bedroom. It requires considerable computing power, electricity and space. Your business would need to look at new premises to house the computers; these computers would need to have the right specifications and be powerful enough to decrypt a complex algorithm which allows access to the blockchain and enables the creation of new coins.
The computing hardware to establish a small mining system could cost your business over £100,000. If it did, you would naturally want to recover the VAT on that expense.
With some UK VAT issues, ‘outside the scope’ supplies have the ‘right to recover’. For cryptocurrency mining, there is no right to recover because HMRC does not see a sufficient link between services provided and consideration received. Following the CJEU’s 2015 ruling, this expense is not recoverable for VAT elsewhere in the EU either.
The problem for cryptocurrency miners is that they cannot register for VAT because they are not regarded as undertaking an economic activity. Therefore, it is advisable for miners to budget for non-recoverable VAT at the planning stage.
As yet, the ‘outside the scope’ VAT treatment has not been challenged in the courts anywhere in the EU. Given the large sums, we feel it is only a matter of time before it appears before Tribunal judges.
What will Brexit bring?
Following Brexit, the UK will have the ability to change VAT legislation as they wish and bend it to their will. (Our earlier article considers the chances of post-Brexit VAT reform.) This has the potential to bring cryptocurrencies in particular, and financial services in general, from exempt status into taxable status. Financial companies may see this as a benefit in terms of recovering VAT that is currently restricted, which for larger companies can run into hundreds of thousands of pounds.
However, even if this were possible, we question whether the government would decide to make it a taxable supply. Prices would increase to include VAT and, at a time when the UK is fighting to keep the City of London as a financial powerhouse, any increase in fees due to VAT could cause companies to base themselves elsewhere.
In the race to stop the EU raiding the City, we feel there is currently no appetite to significantly change VAT legislation for financial services. Appetite for cryptocurrency, on the other hand, looks set to continue growing.
For more information, including guidance on specific cryptocurrency tax matters, please get in touch with us via our enquiry form.