Several of our entrepreneurial clients are making significant investments in cryptocurrencies (such as bitcoin). Others are looking to participate in the launch of new cryptocurrencies, through Initial Coin Offerings. International clients in particular are looking at the opportunity to set up companies to develop the blockchain technology which backs up cryptocurrencies into new business areas, in those offshore jurisdictions such as Gibraltar which already have a regulatory framework.
This is an area where innovation is so fast that tax authorities are struggling to keep up, which means that it is very difficult to establish the correct tax treatment of profits or gains in this area. HMRC have issued two sets of guidance, but these are worded very generally and refer to the particular facts and circumstances of the taxpayer. They are clearly concerned not to set precedents which tie them to a particular treatment of something which hasn’t yet been invented. Regulators in many countries are struggling to categorise coins and tokens, and the characterisations used for regulatory purposes haven’t been adopted for tax (for example, HMRC say that gains on bitcoins should be computed under the pooling rules for securities).
We advise our clients on the basis of applying the evolving guidance and an understanding of the concepts in the legislation to their particular facts.
Many groups which are developing Distributed Ledger Technology are looking to set up companies in locations which have a DLT regulatory framework. Where the company is set up in a low-tax jurisdiction, transfer pricing is a key issue. Setting up a Gibraltar company to own the software, but using UK staff in the UK to do all of the development work on a cost plus basis will not result in all of the profits being treated as arising outside of the UK for tax purposes. Software falls within the tax intangibles asset regime, and it may also be necessary to consider the Controlled Foreign Company rules and Diverted Profits Tax, as well as looking at whether the UK company qualifies for any reliefs.
The taxation of DLT companies is also likely to be a changing area, as governments get to grips with taxing the digital economy, which may involve moving to revenue taxes (such as the proposed EU 3% tax and may introduce the value created by user participation into the transfer pricing considerations.
If you would like to discuss these tax issues in your circumstances, please click here or contact us to talk to a member of our team.
Today marks the passing of less than 3 weeks to go until the closure of the Requirement To Correct (“RTC”) window at midnight on 30 September 2018 and the worldwide adoption of the Common Reporting Standard (“CRS”).
The Finance (No. 2) Act 2017 in s.18 and s.67 created an obligation for anyone who has undeclared UK tax liabilities (involving income or assets outside the UK) to disclose those to HMRC as a final opportunity to allow clients, and their professional advisers, to voluntarily put things right before they are potentially discovered in any case via CRS information exchanges.
After 30 September 2018, the basic penalty is 200% of the tax due unless you have registered for the Worldwide Disclosure Facility (“WDF”). In the most serious cases the penalty can increase to 300%, together with a further penalty of 10% of the assets in question and potential naming and shaming.
The penalties can be mitigated in certain circumstances, but never less than 100% of the tax due even if the taxpayer discloses voluntarily. Where a taxpayer has not disclosed voluntarily the penalty will not be reduced to less than 150%, but HMRC will give reductions depending on the amount of assistance the taxpayer provides. In order though to obtain the full reduction the taxpayer must give HMRC full details of all offshore assets held and details of anyone, or any entity, who has encouraged, assisted or facilitated the tax evasion.
It is important to stress that, unlike the current penalty regime, the new penalties after this month will focus less on the taxpayer’s motives. HMRC’s view is that taxpayers will already have committed the original failure and failed to respond to previous publicity and previous disclosure opportunities (such as the LDF) and now finally have also failed to respond to the RTC legislation.
Furthermore, new legislation within s.166 of the Finance Act 2016 (Appointed Day) Regulations 2017 created a set of new statutory criminal offences that will make it a lot easier for HMRC to criminally prosecute offshore tax evasion cases from October 2018 onwards i.e. within days of the end of the RTC window. As the offences are statutory offences they do not require the prosecution to prove dishonest intent. This could have serious consequences both for individual clients, as well as any overseas service provider in relation to the corporate criminal offence.
There is a very limited window now left in which to regularise any outstanding liabilities before taxpayers become subject to the stringent new penalties.
What Can Trident Tax do to Help?
At Trident Tax we have developed a transactional diagnostic tool, on a completely anonymous basis and at no cost, that will review historical client structures within the current RTC window. The questionnaire can be completed and submitted electronically in a pdf format and normally takes about 20 minutes to complete.
Once the completed questionnaire is received we will conduct an initial review of the structure and produce a short report free of charge which will highlight any areas of concern and where irregularities are identified and outline further action required within what is left of the RTC window.
We have now produced hundreds of these reports and in our experience, irregularities have typically arisen entirely unintentionally in relation to simple administrative oversights caused by third parties or issues unbeknown to corporate officers or trustees, or simply because previously correct advice has since become obsolete or disqualified.
Regardless of the underlying reasons, the RTC window is the final chance to address undeclared UK tax liabilities from the past within the current penalty framework before the imposition of much more severe sanctions.
If you would like to arrange to arrange to receive a copy of the diagnostic tool for any of your clients, please contact us at email@example.com or call your local office.
Is it worth a £60,000 per year cost to be able to rollover taxable cryptocurrency gains when you move from one currency to another?
In our previous articles (click here), we have covered the tax treatment of UK resident individuals on their gains on cryptocurrencies. We’ve explained that in our view the majority of such individuals will be liable to capital gains tax, on the basis of HMRC’s approach as set out in their guidance and the CG Manual.
We pointed out the surprising result that when you convert from one cryptocurrency to another, this can give rise to a taxable gain, even though you have received no fiat cash. However, there is one group of individuals where this is not the case, and their cryptocurrency gains will become taxable only when cash is paid into a UK bank account or the proceeds are otherwise remitted to the UK. However, in some cases the individuals may need to pay up to £60,000 in each tax year to HMRC to achieve this result, so would need to have substantial gains. This treatment applies to individuals who are not treated as UK domiciled for tax purposes and who are taxed on the remittance basis.
“Domicile” is a complex concept but can be broadly explained as being the country which is your home. New legislation was introduced on 5th April 2017, which resulted in people who had lived in the UK for at least 15 of the preceding 20 tax years being treated as UK domiciled for tax purposes for the first time. However, there are still thousands of individuals who are UK tax resident but not UK tax domiciled. These individuals can claim the “remittance basis”, on paying a charge to HMRC of between £30,000 and £60,000 for a tax year, depending on how long they have been resident in the UK. If they have been resident for less than 7 out of 9 of the preceding tax years there is no charge to pay to be taxed on the remittance basis. The claim can be made after the end of the tax year, so you are able to calculate the cryptocurrency gains for the year before having to decide whether to claim for that year.
A non-UK domiciled individual who is taxed on the remittance basis may only be subject to UK tax on the gain on cryptocurrency when it is “remitted” to the UK. This is the case if the cryptocurrency being disposed of is considered to be situated outside the UK, and for this to be the case, it would need to be not subject to UK law at the time when it is created. Most cryptocurrencies are issued by non-UK companies with non-UK legal agreements.
This might be particularly significant where such an individual participates in an Initial Coin Offering (“ICO”). Often the subscription will be made in cryptocurrency. Without the remittance basis, there could be a taxable gain on the subscription for the ICO, which could mean that an individual’s investment has to be smaller.
The key questions are;
a) Are the benefits of being able to defer your tax liability while you continue to invest in cryptocurrencies worth paying HMRC up to £60,000 per year?
b) If they are, how do you establish whether you fall within these rules?
Even if you don’t fall within these rules, does your spouse? It may be possible to give your cryptocurrency to a non-UK domiciled spouse without a tax charge. Gifts between spouses do not give rise to a capital gains tax liability. However, gifts from a UK tax domiciled spouse to a non-UK tax domiciled spouse can give rise to an inheritance tax liability if they are worth more than £325,000, and if the spouse making the gift dies within 7 years.
Please contact us if you would like to discuss the taxation of cryptocurrencies.
It is now less than 9 weeks to go until the closure of the Requirement to Correct window on 30 September 2018. This will mark a crucial turning point in the way that HMRC deals with offshore tax non-compliance.
The Government recently issued draft legislation as part of the Finance Bill 2018-19 that seeks to increase the time limit for HMRC to collect tax in cases involving ‘offshore matters’ and ‘offshore transfers’. Once enacted the legislation will allow HMRC to make tax assessments up to 12 years after the end of the relevant tax year for Income Tax and Capital Gains Tax or 12 years after the date of a chargeable transfer for Inheritance Tax.
The extended time limits will apply to all non-deliberate non-compliance, therefore covering both innocent and careless mistakes. The existing 20 year time limit will also still remain in place for deliberate tax errors.
This comes after oral submissions in Spring of this year made by David Richardson, interim Director General, Customer Strategy and Tax Design at HMRC to the Treasury Sub-Committee, that:
“In the avoidance space, we have pretty well go the full hand we have been looking for as a result of measures that have been introduced over the last five or six years”
The clear message from HMRC through this and other statements made in evidence is that HMRC believes it currently has all the tools necessary to tackle tax avoidance. Importantly, looking forwards, HMRC’s oral evidence also suggested that they view the Common Reporting Standard (CRS) as a ‘game changer’ and the strategic driver of the next fundamental shift – the battle against tax evasion, and in particular offshore tax evasion:
“We have had the first batch of that data [CRS] from the first 50 jurisdictions that signed up, but this autumn we are due to get information from the 100 jurisdictions that have signed up. That will provide us with data that we have never had before on a comprehensive basis of people in the UK putting money offshore” (Source: Ibid)
This timing of the closure of the Requirement to Correct window on 30 September 2018 clearly aligns with when HMRC will receive the majority of the data transfer via the CRS protocol and signals a definite change of stance.
Indeed, many advisers will have already seen via their clients in recent weeks letters from HMRC’s specialist units dealing with wealthier taxpayers concerning the Requirement to Correct. Some of these letters, which the ICAEW describes as “aggressive in tone”, already request additional pieces of information that HMRC considers relevant. The letters may be silent however on the point that a defence of reasonable excuse may exist even after the closure of the Requirement to Correct window. The ICAEW and other professional bodies are currently discussing these concerns with HMRC.
In this environment, to do nothing within the remaining 9 weeks or so of the Requirement to Correct window is not a viable option with a standard penalty of up to 200% of the tax underpaid, plus a potential 10% Asset Based Penalty (ABP), plus ‘naming and shaming’ in the most serious cases. These coming weeks are in reality a final chance to clear up undeclared UK tax liabilities from the past before the imposition of much more severe sanctions and a further hardening of HMRC’s approach.
How Can Trident Tax Help?
At Trident Tax we have since Royal Assent of Finance Act (No.2) last year operated a diagnostic tool, on a completely anonymous basis and at no cost, that will review historical client structures within the current Requirement to Correct window. This can help support some of the technical workload during this busy time.
The questionnaire can be completed and submitted electronically and once received we will conduct an initial review of a structure and produce a short report free of charge which will highlight any areas of concern and where irregularities are identified outline further action as necessary within the Requirement to Correct window.
We have been operating this diagnostic service for many months now and will continue to do so right up until Friday, 14 September 2018. We have produced a large number of these reports for professional trustees, advisers and their clients and where issues have been identified overwhelmingly they have arisen entirely unintentionally, or because previously correct advice has since become obsolete. These are issues which can usually be easily addressed in good time now before the harsher regime comes into force on 01 October 2018.
If you would like to find out more about our free anonymous diagnostic review service please email firstname.lastname@example.org or contact your local Trident Tax office.
• HMRC declares full arsenal of weaponry to defeat aggressive tax avoidance
• HMRC signals its focus will be on clearing backlog via litigation followed by downsizing anti-
• HMRC resources will be shifted to combat offshore tax evasion using new data from overseas
• Calls from Tax Profession not to neglect onshore tax evasion
In Spring this year, the Treasury Sub-Committee called for evidence as part of its enquiry into tax avoidance and evasion.
The scope of the Sub-Committee’s enquiry includes consideration of the following questions:
• To what extent has there been a shift in tax avoidance and offshore evasion since 2010? Have
HMRC efforts to reduce avoidance and evasion been successful?
• Is HMRC adequately resourced and sufficiently skilled to identify, challenge and counteract
existing and new avoidance schemes and ways of evading tax? What progress has it made since
2010 in promoting compliance in this area and preventing and responding to non-compliance?
• What types of avoidance and evasion have been stopped and where do threats to the UK tax base
• What part do the UK’s Crown Dependencies and Overseas Territories play in the avoidance or
evasion of tax? What more needs to be done to address their use in tax avoidance or tax
• How has the tax profession responded to concerns about its role in aiding tax avoidance and
evasion? Where does it see the boundary between acceptable and unacceptable practice lie?
(Source: https://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/treasury-sub-committee/inquiries/parliament-2017/tax-avoidance-evasion-17-19/ )
Although the enquiry has yet to publish any conclusions or recommendations, some key themes may be emerging based on aspects of the evidence now in the public domain.
In particular, it is interesting to note the contributions made orally by HMRC on 17 April this year. One example of note is the following statement made by David Richardson, interim Director General, Customer Strategy and Tax Design, who said the following:
“In the avoidance space, we have pretty well got the full hand that we have been looking for as a result of measures that have been introduced over the last five or six years. Probably the biggest game changer the Government have introduced is Accelerated Payment Notices”
(Source: http://data.parliament.uk/writtenevidence/committeeevidence.svc/evidencedocument/treasury-subcommittee/tax-avoidance-and-evasion/oral/81667.html )
The clear message from HMRC through this and other statements made in evidence is that HMRC believe they have all the tools necessary to tackle tax avoidance: this would include the Disclosure of Tax Avoidance Schemes (DOTAS) regulations; the General Anti-Abuse (GAAR) Regulations; various Targeted Anti Avoidance Rules (TAAR) and, as noted above, Accelerated Payment Notices (APNs), widely seen as fundamentally changing the economics of structured tax avoidance.
David Richardson goes on to signal that HMRC’s Counter Avoidance department will continue to focus on clearing the stock of historic tax avoidance cases (estimated by him at 80,000 users, currently with 75% by value in, or about to be in, formal litigation) but will then likely diminish in size significantly: in other words, the tax avoidance landscape is viewed by HMRC as having fundamentally shifted in recent times with a significant reduction in tax avoidance activity, and consequently much less HMRC resources required in the future.
Importantly, looking forwards, HMRC’s evidence suggests that they view the Common Reporting Standard (CRS) as a ‘game changer’ and the strategic driver of the next fundamental shift – the battle against tax evasion, in particular offshore tax evasion:
“We have had the first batch of that data [CRS] from the first 50 jurisdictions that signed up, but this autumn we are due to get information from the 100 jurisdictions that have signed up. That will provide us with data that we have never had before on a comprehensive basis of people in the UK putting money offshore”
This timing clearly aligns with the “Requirement to Correct” and “Failure to Correct” regulations which introduced extremely harsh penalties for offshore related tax irregularities which are not disclosed by 30 September 2018 (i.e. just before HMRC receives the majority of the bulk data via the CRS procedures).
By way of counter-balance to the above, it is interesting to note the written evidence provided to the Sub-Committee by the Chartered Institute of Tax (CIOT) (see https://www.tax.org.uk/media-centre/press-releases/press-release-persistent-tax-evasion-problem-merits-more-hmrc-focus-not ).
Whilst reinforcing the fact that the tax avoidance landscape has dramatically changed, the CIOT calls for HMRC to focus its attention on what they describe as ‘the elephant in the room’: onshore tax evasion and the hidden economy. This is on the basis that HMRC has, in the CIOT’s view, the legislative weaponry and international infrastructure (e.g. CRS, information exchange agreements) to deal with offshore tax evasion and should invest more in data analytics and human resources to tackle onshore tax evasion.
Where HMRC’s evidence and the CIOT’s submission clearly align, however, is that they imply a shift of activity away from tackling tax avoidance and much more heavily towards tackling tax evasion (both offshore and onshore).
With the “Failure to Correct” deadline of 30 September 2018 fast approaching, this should be ringing alarm bells for anyone concerned about their historic tax compliance situation. In order to meet that deadline steps will need to be taken now to review any areas of potential risk so that, if necessary, disclosures can be made. For some this could be straightforward; for many more, there are likely to be complexities and uncertainties that need careful review and analysis before decisions can be made.
If you need some help to consider matters relating to the above issues, please contact us.
In a recent newsletter we described HMRC’s written invitation sent to certain users of Clavis Herald planning arrangements to settle liabilities on particular terms.
One of the key points in the invitation was that where users offered to pay by way of ‘voluntary restitution’ (because HMRC had no valid tax assessments in place and are now out of time to make any), then HMRC would not pursue so-called ‘secondary liabilities’ where the individual does not reimburse the PAYE paid by the employer (akin to benefit-in-kind charges on the PAYE being settled). The invitation also included a condition that users had to accept they had been guilty of ‘careless behaviour’, with the threat that HMRC could pursue an allegation of ‘deliberate behaviour’ if the invitation was not taken up.
We are dealing with a number of Clavis Herald cases with common features which bring into sharp relief the importance of some key aspects of HMRC’s approach. These issues apply to all users of Clavis Herald planning (not just those in receipt of the invitation) and, we understand, any other EBT type arrangements:
- In a number of cases we are dealing with, HMRC made a Regulation 80 PAYE assessment on the employer on, or very near to, the last possible day before the expiry of the six-year time limit for assessing tax lost due to careless behaviour e.g. an assessment bearing the date 5 April 2016 for the income tax year 2009/10. This might suggest that HMRC made many such assessments.
- If HMRC has made an assessment which could only be valid in the event of careless behaviour the financial effect of accepting culpability for the purposes of reaching a settlement could be very significant. For example, it would eliminate the possibility that amounts were being paid by way of ‘voluntary restitution’ and would therefore increase the required settlement amount by including interest on late paid tax, penalties for careless behaviour and a ‘secondary charge’ liability if the individual did not reimburse the employer for the tax paid on their behalf. Broadly, this could increase the settlement amount by 80% or more for the years in question.
- HMRC would need to make the case for culpability in litigation and should expect to have to do so in any active dispute. A case could only be made in this context based on the particular facts and circumstances of each user following an objective assessment of all the relevant evidence (including testimony from the participants). Assuming the Clavis Herald planning arrangements fail to achieve their intended effect, it follows that the tax lost in each case may have been brought about despite taking reasonable care; because of a failure to take reasonable care; or because of deliberate conduct. Whilst some users may decide to accept or admit culpability, this should only be done with ‘eyes wide open’ i.e. a conscious decision to do so based either on expediency or based on the evidence and arguments put forward (in general, firstly by HMRC).
The key message emerging from this is as follows: before agreeing to settlement terms, even if they may appear favourable compared to HMRC’s suggested alternatives, careful thought needs to be given to the question of conceding culpability – it can have very significant and sometimes unintended consequences; especially where HMRC would otherwise be out of time to make a valid assessment.
Trident Tax acts for a number of Clavis Herald scheme users and if you would like to discuss your options, please contact us.
Despite the policy intention behind the concept of protected trusts, it has now been discovered that a flaw in the legislation means that deemed domiciles will be taxable on an arising basis on any Offshore Income Gains realised within what they believed were protected trusts. Although this point is not covered specifically in the ICAEW article we have provided a link for, we believe there is also a problem for non-doms who have not yet become deemed domiciled but have been resident in the UK for 7 years or more and have used a protected trust to avoid the need to pay the Remittance Basis Charge.
The problem lies not in the new legislation specifically, but the fact that Regulation 19 of the Offshore Funds Regulations has not been amended to take account of the protected trust legislation. The protection in question applies to “protected foreign source income”, which is income that would be relevant foreign income of a UK resident individual. Regulation 19 still defines relevant foreign income as income to which the remittance basis applies in the tax year in question – that can never be the case for a deemed domicile person and, therefore, no protection is given to prevent OIGs of the trust being taxed as they arise on the deemed domiciled settlor. Similarly, a non-dom who is not yet deemed domiciled and is not using the remittance basis because their overseas income and gains arise in a protected trust will also have the problem of being taxed on OIG’s that have arisen in the trust structure.
Until this issue is resolved, trustees may need to be very cautious about any decisions to dispose of units in non-reporting funds that could trigger unexpected income tax liabilities for deemed domiciled settlors and those who aren’t yet deemed domiciled but have used protected trusts as an alternative to the Remittance Basis Charge. If the OIGs arose by 5 April 2018, the problem already exists and the settlor’s 2017/18 tax return will need to include OIGs where relevant, unless HMRC make an appropriate statement on policy or publish something akin to an extra statutory concession to deal with what is a very unfortunate problem.
Four professional bodies – ICAEW, the Chartered Institute of Taxation, the Society of Trust and Estate Practitioners and the Law Society of England and Wales – are lobbying HMRC to amend the legislation and have produced a survey for offshore trustees that is designed to inform HMRC of the scale of the problem. The questionnaire is very short – just six questions – and we would encourage all trustees to complete it.
It is very disappointing this error has arisen and perhaps even more disappointing that the government apparently needs to be persuaded of the need to correct it; why else would the survey be needed?
We would be interested to hear any feedback you have and have attached links below to an ICAEW article on the subject and, secondly, a link that allows you to complete the survey.
HMRC has written to a number of businesses that entered into tax planning arrangements promoted by Clavis Tax Solutions Limited that involved the creation of a Special Purpose Trust (‘SPT’) via an employment reward consulting firm (often referred to as ‘Clavis Herald planning’). HMRC’s letter invites these businesses to reach a financial settlement of the disputed liabilities.
HMRC has warned that anyone refusing the proposed settlement terms risks being pursued for higher penalties on the basis that any tax lost is due to deliberate behaviour (which would trigger a penalty of at least 35% of the tax and NIC instead of 15%) and being ‘named and shamed’. HMRC also gives heavy warnings that failure to settle the planning will mean that individuals with any outstanding loans will be taxed under the new 2019 loans charge.
Any business in receipt of HMRC’s letter wanting to settle and avoid the 2019 charge must register their interest with HMRC before 1 June 2018 (note that this deadline applies to all EBT type arrangements and not just Clavis Herald).
The settlement terms being offered to these selected businesses include the following:
- The company must agree that PAYE tax and NIC is due on the employment income paid through the scheme;
- The company must accept that it failed to take reasonable care and is liable to a penalty of 15% of the tax and NIC as well as interest for years where HMRC has issued valid assessments (‘protected years’);
- Employees who are Directors must reimburse any income tax paid by the employer for protected years or otherwise undertake that the tax paid by the employer will be shown as a benefit on a P11d for the Director in line with s223 ITEPA 2003 (‘secondary charge’).
- Other standard EBT settlement terms will apply e.g. credit will be given for tax paid by employees on loans if within time to make a claim, the employer will receive relief for any additional NIC in the earliest open year.
- The offer from HMRC states that in cases of voluntary restitution (i.e. where no valid assessments are in place and HMRC is now out of time) there will be no penalty, interest or a secondary charge on the Director. HMRC’s technical rationale for this is unclear but appears to be that the tax liability being settled is voluntary, not legally enforceable and not therefore within the secondary charge legislation.
In principle we would welcome any reasonable proposal from HMRC to resolve disputed liabilities without litigation. However, some questions are likely to arise in connection with the recent approach, including the following:
- HMRC are proposing to settle these cases on the basis of an acceptance of carelessness with a warning that an allegation of deliberate behaviour may follow if the offer to settle is not taken up. Will this offer also be made to other users of the Clavis Herald arrangements who have not received the letter and if not, why not?
- Is it sustainable to view a tax planning arrangement as automatically involving careless behaviour if clients were given tax advice from a qualified professional and completed tax returns in line with that advice?
- What about those clients who believed they acted in good faith and took particular care to ensure the transaction was completed correctly?
It is worth noting that the 2019 charge is based on outstanding loan balances, so the same amount of tax and NIC is not necessarily in play. In cases where HMRC has failed to protect its position and no loans are outstanding, there will be no requirement to settle any liabilities. The funds held in the SPT will be subject to PAYE only to the extent they are paid out in future.
The fact that HMRC is offering standardised settlement terms will be a relief for many because it will avoid the need to go through an enquiry and remove the threat of more significant penalties. The far more generous terms for voluntary restitution may make the terms attractive where HMRC has failed to protect its position in all or some years. Others may well be wondering why they should accept a degree of culpability when they believe they have done nothing wrong (even if there is more tax to pay). There will be many who continue to feel frustrated that guilt by association will cost them more than those settling on standard EBT settlement terms.
Trident Tax acts for a number of Clavis Herald scheme users and if you would like to discuss your options, please contact us.
Did you calculate the CGT on cryptocurrency transactions for your tax return correctly?
…and what happens if you didn’t? read more
HMRC in their capital gains manual have set out their views on how capital gains tax (CGT) should be computed on cryptocurrency, at CG12100 (here). These rules apply only where the individual is not trading in the cryptocurrency and is not otherwise liable to income tax on the transactions. The CGT exemption for foreign currency gains will not apply because HMRC say “cryptocurrencies are not recognised national currencies”, and the exemption is restricted to gains on currency in bank accounts. So, a capital gains tax calculation is likely to be needed.
There are some surprising results;
- Swapping one cryptocurrency for another generally gives rise to a tax liability if there is a profit
- Even if you haven’t made a dollar gain when exchanging crypto, forex movements may still result in a taxable gain as acquisition cost and proceeds must be converted to £ sterling
- There is a pooling treatment for holdings of the same currency, which effectively averages the price that currency was bought at when you calculate the gain.
- Failure to inform HMRC about gains on cryptocurrencies which you made before 5th April 2017 can give rise to harsh penalties; the deadline for doing so is 30th September 2018.
When is a holding of cryptocurrency subject to capital gains?
If a profit on cryptocurrency is subject to tax as a trading profit, then it is not also subject to capital gains. The question of what trading is, is a wide subject and not addressed in this article. However, as amateur day traders in stocks and shares are not treated by HMRC as trading, it seems likely that in many cases crypto transactions will be treated as resulting in capital gains or losses.
Cryptocurrency will be within capital gains tax if it is an “intangible asset”, which includes a bundle of rights arising under a contract. It seems likely that most cryptocurrencies will fall within this definition.
However, it may not apply to all forms of coins and tokens obtained in an Initial Coin Offering (“ICO”). Derivatives such as options and contracts for differences may also not fall within the capital gains tax rules in this way.
When do you crystallise a gain; moving between different types of cryptocurrency?
Generally, a gain will arise when proceeds are received in a “fiat” currency, (a “non-crypto” one), and if the proceeds are in a currency such as euro or dollars, this would need to be converted to sterling at the rate at that time. If one type of cryptocurrency is exchanged for another, the HMRC guidance says that this is regarded as a “barter” transaction. This means that one currency is treated as being disposed of at market value and the other currency is treated as being acquired at the same market value. In particular, this triggers a tax liability on the gain despite the owner not receiving a “fiat” currency such as sterling.
This would not be the case if the individual is not domiciled in the UK for tax purposes; we will consider this further in a future article.
When is a holding of cryptocurrency a “security” for capital gains tax purposes?
The capital gains tax legislation sets out specific rules, the pooling rules, which apply to “securities”. There has been debate about when cryptocurrencies are securities for regulatory purposes, but the tax definition is much wider. It applies to assets of a type which can be sold without identifying which particular asset is being sold, which includes shares, but also would generally apply to cryptocurrencies; a contract would be for the sale of a specified number of e.g. bitcoins.
Different types of cryptocurrency should not however be pooled.
How do you calculate the gains on a cryptocurrency pool?
You need to keep a cumulative total of the amounts invested in cryptocurrency, including both sterling and amounts invested via other “fiat” currencies, converted to sterling at the spot rate that day. Then for each disposal, you would calculate what percentage of your holding that represented and deduct that percentage of the cumulative cost from your proceeds. You would also deduct that cost from the cumulative cost total ready for the next calculation.
For individuals there are “bed and breakfasting” rules, which would identify an acquisition of shares with a disposal made in the 30 days previously; this acts to prevent individuals from crystallising a tax loss by disposing shortly before 5th April and then reacquiring.
The effect of this is that it averages the costs of your holding in determining what can be deducted from your proceeds. This may well be more advantageous than a “first in first out” policy would be, if you made your first purchases at lower prices. If you calculated the capital gains tax on cryptocurrency on your 2016/2017 tax return on a “first in first out” basis in error, you are still within the time limit to amend it onto a pooled basis to reduce your liability.
What happens to the pool on a “fork”?
The HMRC guidance also covers the tax treatment of “forks”, where a cryptocurrency splits. For example on 1st August 2017, each holder of a Bitcoin received in addition 1 Bitcoin Cash. You might expect that since you did not pay anything for the Bitcoin Cash, there’s nothing to deduct in calculating a gain on it. The HMRC Manual suggests that the pooled base cost in Bitcoin that you had at 30th July 2017 can be split between Bitcoin and Bitcoin Cash in the proportion that their market values had to each other on 1st August 2017.
Penalty regime unless tax is corrected by 30th September 2018
There is a tough penalty regime – Requirement to Correct – which applies to offshore assets, and for capital gains tax purposes, a holding of cryptocurrency is an offshore asset because it is not subject to UK law. So even if the individual is UK resident and makes the investment sitting at a laptop in the UK, if the platform is outside the UK, the cryptocurrency is an offshore asset.
This penalty regime applies where there has been a failure to notify; an individual who realised a capital gain in the tax year to 5th April 2017 and who has not received a tax return should have notified chargeability by 5th October 2017. If such an individual doesn’t correct their position by notifying HMRC of the gain by 30th September 2018, there is a potential exposure to penalties of up to 200% of the tax not corrected.
HMRC published their capital gains tax guidance in December 2017, so in theory tax returns for 2016/2017 which were submitted by 31st January 2018 should have been completed on the basis set out in the guidance. These returns can still be amended, and again this would need to be done by 30th September 2018 as otherwise there is a potential exposure to significant penalties.
If HMRC discover after the amendment period for 2016/17 ends on 31st January 2019 that cryptocurrency gains have been omitted from returns, for example because you did not realise that the conversion of one cryptocurrency into another crystallised a gain, then because your return was not in line with their published guidance, they are likely to be able to assess the tax anyway.
In this article, we’ve used “woolly” language, like “generally”, “may”, “could”. The HMRC guidance is written using this type of frustratingly vague language. The problem is that the tax law can only be applied to a particular situation, and as cryptocurrencies are such a fast-developing world, any definite language could be proved wrong by something new. To arrive at a definitive answer, you’ll need an adviser who will apply the tax legislation to your particular investments and situation.
5th July 2016 was the commencement date for the very broad “transactions in land” legislation. Non-UK resident companies are within the scope of the legislation if they are dealing in or developing UK land, or if they have acquired UK land with the intention of realising a gain from its disposal or development. They are also within the scope if they dispose of shares in a company, at least 50% of whose value derives from UK land, as part of an arrangement to realise a gain on UK land. The double tax treaties with Jersey, Guernsey and the Isle of Man were altered at this time, so that a company resident in those jurisdictions would not have protection from a double tax treaty on such a profit or gain. The profits are taxed as trading profits.
In particular, a non-UK resident company, selling shares in a non-UK company to a buyer who is also a non-UK company, can have a UK corporation tax liability on the disposal, if the company being sold holds UK land.
Where a company was already part of an arrangement within the scope of this legislation when it was introduced, then it is deemed to have an accounting period starting on 5th April 2016, and ending on the next date to which the company has drawn up accounts. For example, that accounting period might have ended on 31stDecember 2016. If the company does not have a UK permanent establishment, or is otherwise not registered with Companies House, then it will not have been sent a UTR, and will not be on HMRC’s records. In this case, there was an obligation to notify chargeability before 31st December 2017.
It should be noted here that the amount of the corporation tax profits could be more than the company’s profits, because of the application of the anti-fragmentation rules. For example, if an offshore shareholder has lent money, it is possible that the interest cost is effectively disallowed in computing the borrower’s corporation tax liability. These rules could therefore mean that there is a taxable profit in the company in an accounting period in which there has been no disposal of the land (because of the effective add-back of interest).
Where a company has not notified chargeability by this date, it is within the “requirement to correct” rules, and unless it notifies and corrects its position by 30thSeptember 2018, it could be liable to penalties of up to 200% of the tax that has not been corrected.
The company will also have failed to pay its first corporation tax liability on time, incurring further penalties.
If you require help or advice please do not hesitate to contact one of the client team.