How to put Bitcoin on your Balance Sheet

The COVID-19 pandemic and the resulting economic crisis has pushed all governments around the world to print money like never before resulting in a global devaluation of cash assets. People and companies sitting on large piles of cash have struggled to invest that cash into harder assets such as gold, real estate or equities (in particular big techs that have been perceived as less immune to the COVID-19 dislocation event). 

But more and more people have been turning to Bitcoin as well. Indeed the cryptocurrency has all the characteristics of a hard currency (the supply is limited by a hard cap of 21 million coins) without the downside of existing options (lack of convenience, low liquidity, elastic inflation -- as prices increase, inflation rate increases as well along with economic incentives). As fears that government might outlaw the cryptocurrency fade away, more and more corporates are taking the plunge. This is a virtuous circle: as more and more companies hold the cryptocurrency on their balance sheet, and as governments acknowledge and regulate that behaviour, the legal risk evaporates. 

Microstrategy was the first public company to announce that they converted the majority of their Treasury into Bitcoin, a total of $425 million. Since then a number of businesses have disclosed that they had done or intended to do that as well. Coldcard creator, Rodolfo Novak, has even put up a web page listing those businesses. 

Converting part of your Treasury into Bitcoin is more complex than converting it into another currency, especially if you don't have the resources of a large public company. But if you're ready to protect your funds with a swarm of cyber hornets, here are some of the issues and how to deal with them:

Security

As most people know, holding Bitcoin is hard. Everyone has heard of hacks or mistakes that have cost Bitcoin owners their savings. As a company putting a significant amount of your Treasury in Bitcoin, you have a fiduciary responsibility to ensure that those funds are secured properly. You have basically 3 options. 

Remitting money from mixed funds: the ordering rules

Most people who are UK resident, non domiciled and who use (or have used) the remittance basis of taxation know that they should only remit funds from a capital account if they don't want to pay taxes on the funds remitted. And most people who intend to benefit from this advantageous tax system will have created a capital account prior to coming to the UK that allows them to live in the UK without having to pay any tax on the funds they bring over. 

But sometimes, people will only have been made aware of those rules once they are in the UK. Or they might have created a capital account without enough funds to maintain their lifestyle. In those instances, they will have to bring revenue from what the HMRC calls mixed funds. A mixed fund account is an account that has capital and revenue mixed together. If they need to remit funds from such an account, they will have to pay some tax. But the calculation of that tax can very complex because of what the HMRC calls the ordering rules, and which have been in place since 2008.

Each mixed fund account is actually a series of virtual buckets which are increased or decreased every time there is money coming in or out of the account. There are 8 buckets per tax year:

1. UK employment income 
2. Foreign employment income not subject to a foreign tax 
3. Other foreign income (ie. trade profits, rental income or investment income) not subject to a foreign tax 
4. Foreign capital gains not subject to a foreign tax 
5. Foreign employment income subject to a foreign tax 
6. Other foreign income (ie. trade profits, rental income or investment income) subject to a foreign tax 
7. Foreign capital gains subject to a foreign tax 
8. Any funds not covered above (i.e. capital)

Investing directly vs. through a holding company

It's quite common in continental Europe for private equity investors or entrepreneurs to invest in projects through a holding company, either onshore of offshore. 

Not quite so in the UK, mostly because a number of tax benefits are not available in such a situation. And yet it might be a good idea nonetheless.  Let's look at the pros and cons of each approach.

Benefits of investing directly

If you are investing in a company that has the EIS or SEIS status, you need to do the investment directly in order to benefit from the generous tax breaks. 

If you sell investments you will be taxed only once vs having the holding company pay tax on the gain first and pay tax again when you extract the profits from the holding company. 

And also, investing directly is cheaper because you don't need to maintain another structure. 

Benefits of investing through a holding company

If your investment distributes surplus profits regularly to the holding company, no dividend tax is due since dividends are only taxed when they are distributed to the final shareholders. That allows you to ring-fence those profits as if the underlying investment were to go bankrupt, those profits are now protected one level up. 

Another benefit is that when you have multiple investors, they will probably have different time preference when it comes to profit extraction. Having a holding company allows you to be neutral to the timing of those distributions since the tax point is now decided by the extraction at the holding level.

One of the benefit of direct investing is the avoidance of double taxation. However there are situations where those can be avoided. Such a case is the Substantial Shareholding Exemption where the holding company owns more than 10% of an investment for the last 2 years. 

And finally, if you keep the profits in the holding company to be reinvested, you can delay the dividends tax forever. 

Business as usual at TaxAssist Accountants

During the Covid19 outbreak we are following the government's advice to minimise face-to-face contact as part of our commitment to the health and well-being of our clients and employees. So while our shop is closed our team continues to operate as normal. We have access to secure remote IT systems which enable us to work from home and to continue to deliver our services to you.

If you need to meet with us, we can still communicate through video conferencing or over the phone. Our technology stack even allows us to share documents during our calls and therefore do remote training if need be. 

If you wish to deliver your records, we can give you access to Receipt Bank, our document scanning facility already used by a great deal of our clients or we can make specific alternative arrangements. Just contact us at 020 3397 1520, our phone number remains unchanged!

Major change: CGT on residential property sales

There were many changes with capital gains tax in the past few years but most changes only applied to non-resident landlords.

From 6 April 2020, when CGT is due on the disposal of residential property a return must be filed and "notional CGT" paid within 30 days of completion. This is a major change!

The changes

A number of fundamental changes in relation to capital gains tax are anticipated with effect from 6 April 2020 including:

• Reduction in final period exemption from 18 to 9 months
• Restriction of letting relief to periods of co-occupation between tenant and landlord
• Extension of PPR relief for certain inter-spouse transfers
• Reduced deadline for reporting capital gains and paying capital gains tax on sales of residential property

This article concerns the last of these changes.

What is the current position ?

Property owners will be used to having a minimum of 10 months and a maximum of 22 months between incurring a capital gain on the sale of a residential property and reporting the disposal to HMRC and paying the tax. This has been the case since self-assessment was introduced in 1997.

With effect from 6 April 2020, the deadline is shortened to just 30 days, which brings the regime into line with the deadlines which were introduced for non-residents selling residential property after 6 April 2015, and both residential and commercial property after 6 April 2019.

Who does this affect ?

The new rules affect UK resident individuals, trustees and personal representatives who sell or otherwise dispose of residential property. This article concentrates on disposals by individuals. The rules do not extend to disposals by limited companies.

Brexit done! Now what happens to VAT?

Today is the last day the UK is in the EU. Or is it? As the UK has agreed to leave the EU with a deal, there is now a transition period until 31 December 2020 (or later if both parties agree to extend that transition). What it means in terms of VAT, the most visible EU linked tax, is that nothing changes immediately. During the transition period, the UK will remain part of the single market and customs union meaning that we will continue to follow the rules regarding Intra-EU movement of goods set out in VAT Notice 725. In other words, that means one can continue to zero-rate their sale of goods, as long as they have their customers EU VAT number and the goods are sent or transported to another EU member state and that they keep valid commercial evidence that the goods have been removed from the UK within the relevant time limits. And it also means that one must continue to submit EC sales lists monthly or quarterly as appropriate.

Now some people might have been advised by HMRC to obtain an EORI number ahead of the EU exit, in case the UK left the EU with no deal. This reference while of no use for now should be kept as we are still likely to need this at the end of the transition period. Equally if one has registered for Transitional Simplified Procedures (TSP) for imports, one should keep this paperwork ready for the end of the transition period.

Lastly, during the transition period, businesses will still be able to submit valid EU refund claims via HMRC, and those businesses that are registered for VAT MOSS because they supply B2C supplies of digital services to EU consumers, may continue to submit VAT MOSS returns for the time being in the UK, rather than needing to register in an alternative EU member state.

In other words, no change for now!

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 if your signup through our referral link: 

• 1 month free access to any of the premium plans (see all plans here) 
• Priority customer support: this means your are put into a priority support queue and your enquiries are answered first before regular customers. 
• Early access to new features (e.g. merchant acquiring to accept card payments online, FX forwards etc...) 
• Dedicated training video with the Revolut Business team account

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! Alternatively, please use our referral link to open the account. 

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 you 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).