The UK Government has recently launched a ‘Call for Information’ on the benefits and risks of digital currencies. The move, which is intended to support the growth of the UK as a global financial centre, builds on its earlier announcement of conducive tax rules for trading and ‘mining’ activities.
The Call for Information follows Chancellor George Osborne’s announcement in August 2014 that the Government wishes to look at how digital currencies could or should be regulated in Britain. Announcing the launch of its consultation, the Government said it “considers [that] these currencies have the potential to deliver real benefits to customers. Proponents say that they can make payments for users faster, more convenient, and more secure, and mean lower fees for businesses than if they were accepting payment by traditional means.”
Earlier, in March, in a decision heralded by the virtual currency industry, HM Revenue and Customs revised its position on the value-added tax treatment of cryptocurrencies, and in particular Bitcoin, in Brief, 09/14.
It announced that income received from Bitcoin mining activities – the way that virtual currencies are created – will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes.
In addition, income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of “transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques, and other negotiable instruments.”
Next, when Bitcoin is exchanged for sterling or for foreign currencies, such as euros or dollars, no VAT will be due on the value of the Bitcoins themselves.
Last, charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will be exempt from VAT under Article 135(1)(d), as outlined above.
However, in all instances, VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or another similar cryptocurrency. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place, HMRC has said.
The numerous exemptions agreed by HMRC are significant, like many other countries – and EU member states in particular – have issued rules that seek the collection of tax, where the UK does not. The rules, in practice, treat virtual currencies, like Bitcoin, in the same manner as fiat currency for VAT purposes.
This decision from HMRC was said to have been aimed at encouraging the relocation of Bitcoin exchanges to the United Kingdom and to encourage the development of an industry centred on the use of virtual currencies in the UK. The Isle of Man, a Crown Dependency of the UK that shares many of the UK’s VAT rules and also tax receipts, has also set out to foster the development of an industry centred on the use of virtual currencies.
The consultation, therefore, is an extension of the UK Government’s ambition to add virtual currencies to the offerings of its financial centre. Of note, however, is an ongoing review by the European Court of Justice into how virtual currencies should be treated for tax purposes, which could eventually compel the UK to adopt harmonized tax rules with the rest of the EU, potentially removing its current competitive advantages from a tax perspective.
Commenting on the launch of the consultation, UK Chancellor George Osborne said: “I want the UK to be the world leader in financial technology. That will bring jobs here and give new services to British customers.”
Economic Secretary to the Treasury Andrea Leadsom added: “A key part of our long-term economic plan is to cement Britain’s position as the centre of global finance. It’s only by harnessing innovations in finance – alongside our existing world-class knowledge and skills in financial services – that we’ll ensure Britain’s financial sector continues to meet the diverse needs of customers here and around the globe, and create the jobs and growth we all want to see in the future. So it is right that we are properly considering the potential benefits, as well as the risks, that digital currencies could bring to Britain’s economy, businesses, and customers.”
The Government is calling for views from a wide range of sources, including the public, financial technology firms, the financial services industry, regulators, and law enforcement agencies, on “the potential digital currencies have for delivering new, helpful ways for customers to make payments, and for encouraging innovation.”