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Originally published in December 2018, the revised guidance includes a new section on the location of exchange token and is of particular relevance to non-UK domiciled taxpayers who claim the remittance basis of taxation.
While UK domiciled taxpayers are liable to UK taxation on their worldwide income and gains, non-doms claiming the remittance basis are taxable on non-UK income and gains only if they are remitted to the UK.
Domicile has further implications with non-doms only liable to inheritance tax on their UK situated assets.
Crypto assets present particular challenges for determining their location (or “situs”).
Many tokens are underpinned by distributed ledger technologies which mean that, unlike in the instance of shares in a company for example, there is no single register.
HMRC’s update guidance takes the residence of the beneficial owner to be the situs of the crypto token.
If tokens are beneficially owned by a UK resident, they will therefore be UK situs assets and therefore gains arising on disposal will be subject to UK capital gains tax, irrespective of whether the taxpayer is UK domiciled or non-UK domiciled.
For non-UK domiciled individuals, while they are UK resident, such tokens will form part of their estates for inheritance tax purposes.
The UK tax legislation provides statutory rules for determining when particular assets will be in the UK but, says HMRC, “these are unlikely to apply to exchange tokens in most cases”.
While HMRC’s guidance states that this provides a “clear, logical, predictable and objective rule”, there is no legislative basis for the claim. Unless the Government introduces supervening legislation, perhaps in the forthcoming Budget, there may be scope to challenge HMRC’s stance. However, any taxpayer taking an alternative view should consider their position very carefully, including whether appropriate disclosures should be made on their returns. Those who have already filed tax returns on the remittance basis may wish to revisit their filing position.
HMRC’s policy statement applies to exchange tokens.
Adopting the distinctions made in the Crypto Assets Task Force, HMRC distinguishes exchange, security and utility tokens.
HMRC’s concern throughout its guidance, including the most recent relating to situs, concerns exchange tokens which are intended to be used as a method of payment and encompass cryptocurrencies such as Bitcoin.
Utility tokens provide a holder with access to particular goods or services while security tokens may provide a holder with interests in a business (similar to equity or debt).
Care is therefore required here that any particular token is indeed an exchange token. While Bitcoin will certainly meet these definitions, we see clients with many different tokens and determining whether they are exchange, security or utility could be time consuming, if even possible.
One point not addressed in HMRC’s guidance, and one of the key reasons for requiring guidance on situs, is the matter of penalties.
Higher penalties can be imposed for tax irregularities relating to non-UK matters. In the case of penalties under the requirement to correct, relating to pre-6 April 2017 liabilities, these can be severe indeed. If not disclosed to HMRC under the requirement to correct by 30 September 2018, penalties are a minimum of 100%.
While HMRC does not make explicit this argument, it would appear that whether for UK or non-UK domiciled individuals, the penalty position is that relating to UK assets rather than non-UK assets.
HMRC are devoting greater resources to crypto compliance, establishing a team within its Wealthy and Mid-Size Business group which is scrutinising tax returns and disclosures relating to crypto assets. Any non-UK domiciled taxpayer who looks to benefit from the remittance basis may therefore expect HMRC to take a particular interest in their affairs.