Bitcoins and VAT

HMRC (the primary tax agency in the UK) is stifling new financial technology businesses because of their classification of Bitcoins and other virtual currencies. In a nutshell, HMRC do not consider these to be currencies, but instead vouchers which in most cases are treated just as any other asset.

Many Bitcoin sellers aim to buy in bulk from other dealers and then sell them on in much smaller amounts on to others. Because HMRC do not consider virtual currencies as 'real' currencies, any sales above the VAT threshold of just over £70,000 are VAT liable, and there is no way to claim VAT back with this sort of technology. Ultimately, margins are quite low in the Bitcoin world (up to 5%) and it is uncompetitive to charge 25% above the going Bitcoin rate. These rules make running any reasonably sized Bitcoin trading business not viable.

The UK is losing out on a large amount of tax because many businesses need to incorporate elsewhere in order to be able to grow their businesses. Potential solutions HMRC should consider are:

• HMRC actually consider virtual currencies as real currencies. This removes all VAT implications, but brings in potentially tricky issues such as financial regulations.
• HMRC allow the VAT margin rule to apply to virtual goods. This means that VAT will be payable on the difference between selling and buying prices, much like a trader in second hand goods.

It is understandable that HMRC should think about the implications of any of these decisions, but Bitcoin businesses have been on HMRC's radar for some time now and a forward thinking decision is long overdue.