Bitcoins and VAT

HMRC 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 currencies, but vouchers which 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 VATtable, 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 charging 25% above the going Bitcoin rate makes any reasonably sized 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 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.