From 1 January 2019, some subtle changes to the VAT rules surrounding the issue and redemption of vouchers were introduced. These cross over into the world of cryptocurrencies and digital assets.

For VAT purposes, a voucher may be in many formats – physical or electronic – but does not include admission tickets or vouchers giving a discount.  HMRC has expressly stated that electronic money does not fall within the definition of a voucher.

Single-purpose versus multi-purpose vouchers: what are the VAT differences?

The concepts of single-purpose vouchers (SPVs) and multi-purpose vouchers (MPVs) should be familiar to you if your business deals in vouchers by issuing, redeeming or selling them.  A business which issues an SPV needs to account for VAT when the voucher is issued, whereas with an MPV, VAT is accounted for on redemption.

If your business issues MPVs, aside from the cashflow benefit of delaying the time when you need to account for output VAT, you may also experience a high percentage of non-redeemed vouchers.  For MPVs, this represents an absolute VAT saving: if the MPV is never redeemed, there is no requirement to account for output VAT.

Under the new rules, an SPV is a voucher for which the place of supply and the VAT liability of the underlying goods are known when the voucher is issued.  This is wider than the previous definition, under which an SPV as being one type of good or service.  It now becomes harder to fall within the definition of SPV.

An MPV, by contrast, is defined as a voucher which is not a SPV!  This covers vouchers which can be used to purchase goods or services with different rates of VAT.  A voucher which can be used to purchase goods or services in different countries will also be an MPV.

The changes will have an impact on businesses which buy and sell vouchers, i.e. intermediaries who buy and sell as principal.  Under the new rules, the issue of an MPV is no longer a supply for VAT purposes, so an intermediary who buys and sells MPVs on this basis may not be able to recover VAT.  It may be better for such businesses to act as agents and charge a commission to the issuer.

Tokens and cryptocurrencies: when is VAT in play?

HMRC has already confirmed that the initial mining of cryptocurrencies is not a supply falling within the scope of VAT.  Charges made for performing specific cryptocurrency actions such as verifying and arranging cryptocurrency transactions are exempt from VAT.

HMRC has also accepted that transactions in cryptocurrencies fall within the VAT exemption as a transaction concerning currency. This follows the CJEU case of Hedqvist (C-264/14) which dealt with Bitcoins.  (Even though HMRC have not specifically stated that this applies to all other cryptocurrencies, it’s widely considered to.)

During 2018, we saw a number of initial coin offering (ICOs).  In such cases a quantity of cryptocurrency is sold in the form of “tokens” (a.k.a. coins) to speculators or investors, in exchange for legal tender or other cryptocurrencies such as Bitcoin or Ethereum. The tokens sold are promoted as future functional units of currency if or when the ICO’s funding goal is met and the project launches.

In some cases, such as certain decentralised applications (dApps) built on the Ethereum blockchain, the tokens represent the right to obtain services. The key issue here is whether the tokens are considered as being like currency, a prepayment for goods or services or even a voucher. This could lead to an interesting phenomenon whereby different ICOs could have different VAT treatments.

It is conceivable that tokens could be viewed as vouchers, meaning that the voucher rules could in some cases have an impact on cryptocurrencies. Furthermore, depending on the facts the tokens could fall within the definition of an SPV or MPV, which would determine the time when VAT may be due.

2019 has seen a shift towards more tokens allowing the investor a debt or equity stake in the project, which would probably not fall within the scope of VAT.  This results in a token that represents a more traditional asset class, like a bond or share.

The fast-moving world of cryptocurrencies and digital assets presents a challenge for anyone involved in blockchain.  HMRC accepts that the ‘traditional’ cryptocurrencies such as Bitcoin are treated as falling within the VAT exemption similar to other currencies.  By contrast, tokens issued under an ICO could be similar either to Bitcoins or to a voucher or prepayment.

If you would like to have a call or meeting to discuss any of the issues raised, please get in touch with Malcolm Winter or use our enquiry form.