Will VAT Be Dropped On Bitcoin Sales In The UK?

As the world treads through the new frontier created by cryptocurrency like Bitcoin, there is still widespread uncertainty as to how governments  will tax the system. The bottom line is that Bitcoin will never be immune from some form of taxation.

At least not when it ‘materializes’ in the real world, be it when it is cashed out or used to purchase goods. And then the sales of Bitcoin itself is a real world transaction.

The UK government had already taken a stance in November 2013. Bitcoin is subject to value-added tax (VAT) since it is classified as a voucher. However, UK Bitcoiners are hoping to change the classification and now seem to be close to a solution.

Not A Voucher

Bitcoin sales are subject to VAT in the United Kingdom. This means that a 20% tax on the value of Bitcoin is levied on Bitcoin sales which is then payable to the government, or more specifically to the HM Revenue and Customs (HMRC). A meeting held with UK Bitcoiners has led to an unofficial backtracking on the government’s stance that Bitcoin be viewed as a voucher.

VAT

Tom Robinson from BitPrice, bitcoin entrepreneur Michael Parsons, Marc Warne from Bittylicious and Eitan Jankelewitz from Sheridans law firm met with officials from HMRC to explain why Bitcoin should not be subjected to VAT.

The meeting was largely focused on educating HMRC about Bitcoin and the system. According to CoinDesk, Robinson said that the perception he got was that HMRC did not feel that VAT should not be levied on the Bitcoin value. He went on to say that HMRC would look at withdrawing its classification of Bitcoin as a type of voucher.

However, celebrations may be premature. Jankelewitz says that they are hoping to hear from the authorities soon regarding the change in classification. He further added that he found the HMRC to be “open minded” and that he gathered the impression that they were taking Bitcoin seriously. Robinson described this as a really positive move.

Currency or Voucher

While Bitcoiners view it as a currency, albeit a digital currency, this perspective is not shared by everybody. Authorities around the world are hard pressed to take a stance on Bitcoin. The reality is that Bitcoin is not subject to the same currency laws as with real currency. It does not belong to any country and cannot be produced or its value manipulated as authorities would with real currency.

Taking the stance that Bitcoin be classified as a single-use voucher is based on the fact that Bitcoin is not fully recognized as a currency in its own right. But Bitcoin can be exchanged for goods or services in much the same way that a voucher is redeemed. Therefore VAT exemption for currency transactions may not be applicable to Bitcoin according to HMRC.

Bitcoin sellers would have to charge 20% on top of the value of Bitcoin. “Obviously, this puts bitcoin businesses at a huge disadvantage,” says Jankelewitz. Warne even admitted that he was considering moving his business offshore due to the VAT issue on Bitcoins in the UK.

The entire VAT issue may not be as much of a concern for private UK Bitcoiners who are under the VAT threshold. But Bitcoin businesses like exchanges would be adversely affected if VAT is levied on Bitcoin. Given the volatility of Bitcoin, the VAT levied on its value today could be a significant portion of its value tomorrow, well over 20% should the value fall sharply.

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