UK Tax treatment of Crypto-Assets for Businesses

HMRC published a guidance note last year (see our article) on the taxation of cryptocurrencies for individuals. They have now produced a similar document for businesses (see gov.uk website). The HMRC's approach in this policy paper is, as expected, conservative, and it stands in line with other countries’ tax treatment for cryptocurrencies. It's noteworthy however that the HMRC explicitly states that it does not consider crypto as a currency, and the policy paper is careful to use the term "crypto-asset" instead of "cryptocurrency" throughout.

Corporation Tax

Where a token/crypto-asset is being used in a trading activity, companies are to be taxed on their trading profits. Profits need to be calculated in GBP therefore all transactions need to be converted into GBP at the time of the transaction.

Where a token/crypto-asset is used in a non-trading activity, it is be treated as an investment and so any gain on disposable is to be subject to CT on chargeable gains. Some but not all costs can be allowed as a deduction when calculating the gain. Cost of mining for example is not allowed unless the mining activity is done as a trade. The calculation method is following section 104 of the TCGA 1992 i.e. using a pool per asset class but with slightly different anti-bed-and-breakfast rules (a sale is matched against the pool unless a purchase happen in the next 10 days -- and not 30 as usual). And in case of a hard fork, cost base needs to be split on a "just and reasonable" basis.

The different types of Pension in the UK

Before 2012, Pension Contributions were optional and for a lot of people who had never contributed to private pensions, the State Pension paid by National Insurance Contributions (currently at £130 per week if you have 30 qualifying years) was not enough to live on.  Automatic enrolment changed this, making it compulsory for employers to automatically enrol their eligible workers into a pension scheme. Currently employees need to contribute 5% of their qualifying earnings and employers 3% (at a minimum), the objective being to supplement (and potentially replace) a State Pension that cannot cope anymore with the changes in demographics.

But not every scheme behaves the same. And it's important to understand the difference between the different schemes because some of them require that you take an extra step to claim the full tax benefits you're entitled to as failure to do so means that you will leave significant tax savings on the table.

There are basically 3 schemes available:

1. Tax relief at source

This is the most common scheme. It's used by the government owned Nest scheme as well as People's Pension. It works the same way as if you were paying yourself directly into a Private Pension: whatever is put in your pension, the HMRC adds 20% to it. In other words, only 80% of your pension contribution is deducted from your after tax salary on your payslip and it means that even if you don't pay tax (because your income is below the personal allowance), you get an pension relief of 20%. The downside however is you only get 20% relief even if you are entitled higher relief because you are a higher rate taxpayer and in order to get the full relief, you need to do a tax return.

Revolut firing on all cylinders

This week, Revolut announced a very bold deal with VISA that will bring the headcount at the UK Fintech from 1,500 to 3,000 and the number of countries it operates in to 24 (including the US, Japan and Singapore). It could also lead the challenger bank to triple it customers base, from 8 to 24 million in the span of a single year.

But expanding its retail reach is not the only thing Nik Storonsky has been doing. They have been hard at work filling the gaps in their business offering too. Recently, thanks to their recent banking license, they have been able to start silently rolling out Direct Debits in the UK. After unique IBANs, that was one of the most often requested feature from businesses in the UK. Indeed, as much as you can do without cheques or branches, you cannot without Direct Debits. Many suppliers (and insurances or pension providers are such suppliers) will insist on being paid using the UK Direct Debit system. And unless you can offer the feature you can never replace the incumbents.

It has also done something that legacy banks used to do and have since stopped for some reason: get partners on board to help grow their business. As an accountant we are at the right place to nudge customers to one bank or another when we create a company. Not for the money (the commission a bank can give is too tiny to make a difference) but for the client experience. And Revolut understanding that, they are now asking accountants to help the onboarding process and offering extra features to our clients in exchange.

So, as a client of TaxAssist Accountants, if you open an account with Revolut, you’ll get exclusive access to a global business current account for easy international payments, with prepaid business cards, easy integration with Xero and other tools. You'll be able to hold, receive, and exchange 28 currencies without unfair bank charges or hidden FX fees.

And on top of that you'll be entitled to the following features that are normally only available on the £25 per month plan:

• User permissions
• Payment approval
• Bulk payments
• Perks from third party vendors 

So if you are a client of ours, and if you think that Revolut can provide an answer to your banking woes, do not hesitate to reach out!

Granted, Revolut has been doing just fine as a specialised financial institution focussing on cheap Money Transfers and Foreign Exchange but the company wants a much bigger pie of the banking business and if current behaviour is any indication, it's well on its way...

Pensions: the Lifetime Allowance time bomb

With rates at historical lows, with $9.5 trillion worth of government debt carrying negative yields and with governments around the world addicted more than ever to Quantitative Easing, fiat money around the world is losing its value faster than ever. It means that the value of a pension fund invested in hard assets (and yes Bitcoins are also an option...) is more susceptible than ever to go over the The Lifetime Allowance (LTA) at some point. Indeed, you just need an 8% annual return over 20 years to multiply the value of your pension by a factor of 5!

The Lifetime Allowance (LTA) is the overall limit a pension plan can reach before its owner is being penalised by a 55% tax upon withdrawal. The Lifetime Allowance after having reached £1,800,000 in 2011/2012 was reduced all the way down to £1,000,000 in 2016/2017 and stayed there for a couple of years before starting to increase again with the CPI (consumer price index) in 2018/2019. It is now at £1,055,000 (2019-2020).

The government tests your pension against the LTA when you take a benefit (eg you take a drawdown or an annuity) or when you reach the age of 75. It's called a benefit crystallisation event (BCE). Nowadays, the most popular way to extract money from a pension is through flexible drawdowns. When take your benefit via a drawdown, 25% of the drawdown is tax free cash and the rest goes into drawdown mode where it can continue to be reinvested tax free (but still potentially subject to the second LTA test -- see below). The money can be taken at any point from the drawdown fund and is taxed as income on the taxpayer when it is taken. The tax free element and what is left in drawdown is compared to the LTA at the time of the crystallization and the corresponding percentage is added to the ones from the previous drawdowns. If you end up over 100% then the additional amount above the current LTA is either taxed at 55% if you take if out of the drawdown pot immediately or 25% if you leave it there (and it will be taxed a second time as income when you take the money out of the fund).

HMRC asking for records of Crypto Exchanges

With Bitcoin looking like it's here to stay, HM Revenue & Customs, is now pressuring crypto-currency exchanges to reveal customers' names and transaction histories, in a bid to claw back unpaid taxes, industry sources said. Letters requesting lists of customers and transaction data have landed on the doorsteps of at least three exchanges doing business in the U.K. – Coinbase, eToro and CEX.IO – in the last week or so, the sources said.

The move is following a pattern set by the U.S. Internal Revenue Service (IRS) and other governments. Last month, the IRS began sending warning letters to over 10,000 Americans who it says participated in virtual currency transactions but did not report them properly.

HMRC is looking to get up to 10 years worth of historical data but that might prove difficult to achieve. Still, even if the administration manages to go back 3 years, it would mean serious tax bills for those who thought trading virtual currencies was a tax free endeavour! HMRC published in 2018 a policy paper explaining the tax treatment of crypto-assets. As described in the paper, for most people, capital gains tax will be due on any gains they might have realised. But doing the calculation of the gain might prove more complex than with other securities. Indeed, transferring bitcoins in or out of an exchange is not a taxable event per se. And conversely, buying something with Bitcoin or receiving income in crypto-currency is a taxable event!

This is why it's crucial to keep records or all transactions and refrain from using crypto-currencies as a payment currency, at least until there is a de minimis exemption like with other currencies. As, even if your gains are below the annual allowance of £12,000 (for 2019/20), you still need to declare the sales if they total more than 4 times the annual allowance, i.e. £48,000. For people who don't already do a tax return, it means registering for Self Assessment. And if you are aware of gains that you have failed to declare in the past, it's a good idea to come forward and call HMRC to avoid steeper penalties.

Managing cash in your business

With interest rates at a record low in the UK, and with dividend tax rates now going up all to way to 38.1% for additional rate tax payers, many small businesses are reluctant to extract money from their limited company and are wondering how to make that cash left in the business produce significant income. Unfortunately there is not one single answer and each available options comes with its own benefits and drawbacks.

Savings Account

The simple answer is to open a savings account for the company. Most banks will allow for that but unfortunately the rates are ridiculously low. Major banks will typically pay between 0.5% and 1% depending on how long you are willing to lock your money for. And while it's possible to find slightly better rates at smaller banks or financial institutions, one has to be aware that the Financial Services Compensation Scheme (FSCS) that protects personal accounts up to £85,000 is not always available for Limited Companies.

The Lifetime ISA aka LISA

With just 2 weeks left until the end of the tax year, now is the time to look at all the options available to reduce your tax bill for the year 18/19.

We have written a detailed article on the subject in the past and most taxpayers are aware of the more popular options such as pension contributions and investments into ISA or EIS.

One container however which is often overlooked is the Lifetime ISA aka LISA. It was introduced in 2017 and can be used in conjonction with the other vehicles (even though the total amount for both ISA and LISA remains capped at £20,000). As with a regular ISA, all income and gains inside the container are tax free. But as with a pension, money contributed up to £4,000 will receive a 25% top-up from the government. All the specifics are described in the article mentioned above so please refer to it for more details but here is a list of scenarios where investing in a LISA makes sense:

You plan on purchasing your first home in the near future

Obviously this is the main use case for that product and it therefore makes sense to use it in that case. The only constraint is that the house be less than £450,000.

You are a basic rate band tax payer

If you are basic rate band tax payer, i.e. you marginal tax rate is 20%, the tax benefit you get from the LISA is identical to the one you get from a pension. But with a LISA the money is blocked for a much shorter period since you can get the money out when you purchase your first home. If you don't have a property yet, this is therefore a great option for you to look at.

KPMG small business accounting unit bites the dust

After having decided in the wake of Carillion to stop non-audit services to the FTSE 350 clients they are auditing, KPMG has now decided as well to stop the small business offering that was launched in 2014. Clients of the accountancy firm have been receiving letters announcing the move and requesting that they find alternative arrangement for their accounting needs.

KPMG had vowed in 2014 to disrupt the SME market by saying at the time "you can pay us the same as your current accountant but we'll give you more". The market at the time had been skeptical that a  big four firm like KPMG with the overheads they are famous for could be competitive in such a market. And it looks those pundits were right.

No one likes business disruption, but the good news if you have been receiving one of those letters is that we, at TaxAssist Accountants, a firm that focuses on small businesses, are ready to take over your accounting business. We do support Xero and Receipt Bank so your day to day will remain unchanged and your business undisrupted. We will also, in most instances, be able to match the existing KPMG pricing.

So if you are looking for an accountant to replace KPMG, don't hesitate to give us a call at 020 3397 1520 to discuss how TaxAssist can help your business. Our first consultation is always free!

Tax treatment of cryptoassets: an update from HMRC

HMRC published this week a new policy paper on the tax treatment of crypto-assets. The previous paper was from 2014 (see our previous article on the subject) and this one goes into further details  but only concerns the individual taxpayer. The government has promised a further update for corporations at some point in the future.

In the paper HMRC defines 3 types of assets: Exchange Tokens (such as Bitcoin and most crypto-currencies and that can be used as payment rails), Utility Tokens that provide the holder with access to specific goods or services (such as those issues during an ICO) and Security Tokens which provide the holder with interest in a business (either debt or equity).

Essentially, individuals will be liable to pay either Capital Gains Tax (CGT) if investment is casual or Income Tax (IT) if they are actively involved in the trading of the cryptoassets. The paper goes into quite a lot of details and specifies many possible scenarios and their tax treatment but here are a few points that are worth noting:

Change in VAT treatment of retailer vouchers

HMRC issued guidance recently aimed at simplifying the tax treatment of retailer vouchers and at bringing it up to date with a revised EU VAT directive.

Those changes are to be effective January 1st 2019 and even though they may seem like a minor, it could mean significant tax increases for some retailers who will see some of their vouchers reclassified and their VAT treatment altered.

Currently there are 3 different types of vouchers:

1. Experience vouchers that have no face value but entitle the bearer to redeem a specific service.
2. Single purpose vouchers (SPVs) which entitle the bearer to redeem for only one type of goods or services which are subject to a single rate of VAT
3. Multi-purpose vouchers (MPVs) which can be redeemed for any type of goods or services and are subject to different rates of VAT

For experience vouchers and SPVs, VAT needs to be accounted when the voucher is issued or sold rather than when it is redeemed. This is regardless of whether it is ever redeemed. There is no provision for adjusting the VAT if the voucher is not redeemed before the expiry date. The new guidance actually widens the definition of an SPV: going forward an SPV will be defined as one where, at the time of issue, both the VAT liability and the place of supply of the underlying goods or services are known. An MPV is then a voucher which is not a SPV.