HMRC Guidance
Further to my articles on cryptocurrencies here, here and here HMRC have update their guidance on cryptoassets which was published on 20 December 2019.
Background
VAT is due in the normal way on any goods or services sold in exchange for cryptoasset exchange tokens.
The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place.
Definition
Cryptocurrency (an example being Bitcoin) is a line of computer code that holds monetary value. Cryptocurrency is also known as digital currency and it is a form of money that is created by mathematical computations. In order for a Bitcoin transaction to take place, a verification process is needed, this is provided by millions of computer users called miners and the monitoring is called mining. Transactions are recorded in the blockchain which is public and contains records of each and every transaction that takes place. Cryptocurrency is not tangible, although they may be exchanged for traditional cash. It is a decentralised digital currency without a central bank or single administrator (which initially made it attractive) and can be sent from user to user on the peer-to-peer network without the need for intermediaries.
Cryptoassets
For VAT purposes, bitcoin and similar cryptoassets are to be treated as follows:
- exchange tokens received by miners for their exchange token mining activities will generally be outside the scope of VAT on the basis that:
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- the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration; and
- there is no customer for the mining service
- when exchange tokens are exchanged for goods and services, no VAT will be due on the supply of the token itself
- charges (in whatever form) made over and above the value of the exchange tokens for arranging any transactions in exchange tokens that meet the conditions outlined in VAT Finance manual (VATFIN7200), will be exempt from VAT under The VAT Act 1994, Schedule 9, Group 5, item
The VAT treatments outlined above are provisional pending further developments; in particular, in respect of the regulatory and EU VAT positions.
Bitcoin exchanges
In 2014, HMRC decided that under The VAT Act 1994, Schedule 9, Group 5, item 1, the financial services supplied by bitcoin exchanges – exchanging bitcoin for legal tender and vice versa – are exempt from VAT.
This was confirmed in the Court of Justice of the EU (CJEU) in the Swedish case, David Hedqvist (C-264/14). The appellant planned to set up a business which would exchange traditional currency for Bitcoin and vice versa. It was not intended to charge a fee for this service but rather to derive a profit from the spread (the difference between his purchase and sell price).
Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.
The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services carried out for consideration.
The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin (and vice versa) are financial transactions and fall within the exemption under VAT Directive Article 135(1) (e).
A supply of any services required to exchange exchange tokens for legal tender (or other exchange tokens) and vice versa, will be exempt from VAT under The VAT Act Schedule 9, Group 5 item 1.
Commentary
As always, the legislation and case law often struggles to keep pace with technology and new business activities. Although the focus of the guidance is more towards direct taxes, it is a helpful summary of HMRC’s interpretation of UK and EU law and decided case law.