Navigating UK Cryptocurrency Tax

Blog Author:

Graeme

Post Date:

1 January 2024

Cryptocurrencies have rapidly evolved from niche assets to mainstream investments, capturing the attention of investors and regulators alike. As the popularity of crypto grows, so does the need for a clear understanding of the tax implications associated with these digital assets.

The 2022/23 tax return is the first one that HMRC has properly recognised income from Crypto. Just goes to show that Crypto is now mainstream and something that HMRC are starting to get very interested in.

Are you looking to get involved in the ‘world of crypto’ but don’t know where to start with how to stay tax-efficient, and what you actually owe taxes on.

In this comprehensive guide, we’ll explore the intricacies of cryptocurrency taxation in the UK, shedding light on key guidelines and considerations.

HMRC Guidelines and Reporting

HMRC does not view cryptocurrencies as ‘currency’ or ‘money’. Instead, they are treated as property, making them subject to Capital Gains Tax (CGT) upon disposal, which includes selling, trading, or gifting them.

Taxable events also include using crypto to pay for goods or services, exchanging them for a different type of crypto asset, and giving them away, with some exemptions like gifts to spouses or civil partners.

Key points to consider:

  • Disposal of crypto assets may necessitate paying CGT, especially when gains exceed the tax-free allowance.
  • Various transactions, including selling tokens, exchanging them for a different type of crypto asset, using tokens for purchases, and gifting, can trigger CGT liabilities.
  • To calculate CGT, you must determine your gain for each transaction. The gain is usually the difference between what you paid for an asset and what you sold it for. Specific rules apply if you sell tokens within 30 days of buying them.

In previous years, you may have had a defence that there was no box on your tax return for explicit cryptocurrency gains or losses, and you have muddled up your CGT return. Now there is a box on your tax return for crypto gains or losses. This means that in slightly boring accountancy speak, you need to have ‘supporting schedules’ for your crypto gains or losses.

Taking off my accounting/tax hat for a moment, this means you have a document which shows every trade (see definitions below for what this could be) of cryptocurrency that you have done.

My sources tell me that the HMRC will be asking the organisations behind the major cryptocurrencies for reports on who has traded what and when, just as they are doing this for Amazon, Etsy and the big online buying and selling platforms. How will this happen? Who knows? But the revenue has mighty computers that love analysing data and comparing it against the returns that have been submitted.

The bottom line is cryptocurrencies are a minefield for tax purposes. (Do you like my pun?) You may only be dabbling in them, but I can’t state this more strongly: you will need the help of an accountant. That’s to file your tax return both for you personally and any investment or trading business that you have. Not just any accountant. Given my 30 years of wrangling with HMRC, I can see that they are gearing up to start poking around in crypto investors affairs. A ‘cloud accountant’ or a ‘digital accountant’ or an accountant specialising in small business owners isn’t good enough. You need an accountant who truly understands tax and crypto. (Hint: We do) If your accountant charges you under £500 for your tax return, if you have dealings with Crypto, then run away very quickly…

Tax Considerations for Crypto Investors

Crypto investors engage in various activities, including trading, mining, and staking. Each activity comes with its own set of tax implications.

Trading

This is where you buy crypto assets using ‘normal’ currency and sell them on for a profit. These profits from buying and selling cryptocurrencies could be subject to CGT if they exceed the tax-free allowance. In exceptional circumstances, where trading is frequent and sophisticated, it might be treated as income and subject to Income Tax. Once again, ask your accountant to deem whether your trading can be treated as income. The likelihood is it wouldn’t be.

Mining

For certain types of crypto assets, such as Bitcoin, you can earn rewards by ‘mining’. Income from mining is treated as trading income or miscellaneous income, depending on the nature of the activity. In either case, the income is taxable if it exceeds the trading allowance of £1,000 in a tax year.

Staking

Staking is a form of a reward that you can earn from your crypto assets and is typically taxable as trading or miscellaneous income. Individuals may treat it as savings income and claim a personal savings allowance, but CGT rules may apply if disposed of later.

Airdrops

This is nothing to do with Apple products! This could be a ‘free’ crypto asset received from someone else in return for a service or simply because you own another type of crypto asset. The tax treatment of airdrops depends heavily on the reason for receiving the crypto asset.

For all of the above, Income Tax and National Insurance contributions apply to crypto received as income. The tax rate depends on total income, with specific bands determining the applicable percentage.

Calculating and Reporting Gains

Calculating CGT involves determining the gain for each transaction, typically the difference between the purchase price and the sale price. Allowable costs, such as transaction fees, advertising, contract preparation, and valuation fees, can be deducted. Crypto assets must be grouped into pools by type for cost calculation, with specific rules applying to tokens bought and sold within 30 days.

Reporting and paying CGT can be done through a Self Assessment tax return. Accurate record-keeping, including transaction types, dates, quantities, values in pound sterling, and bank statements, is essential. This is not me being a boring accountant, this is me saving you time, money and angst in the future.

Beyond investment, cryptocurrencies are increasingly used as a form of income. If used for forms of income, such as payments for employment duties, these could be subject to Income Tax and National Insurance contributions.

How much tax do I need to pay on my crypto assets?

For CGT from crypto over the £12,300 tax-free allowance, you’ll pay either 10% or 20% tax, depending on which band you fall under. The amount depends on transactions made, the tax that applies and the Income Tax band that you fall into.

The bill can be reduced by unused capital losses brought forward. This means it is SO important for your tax returns to be done promptly and any capital losses clearly identified. These capital losses could be more than just Crypto, such as selling shares at a loss, or making a loss on a property deal. You get the picture! I’m going to get boring again, but record-keeping here is vital again…

How should I get started?

The crypto landscape is ever-changing, and staying ahead of emerging trends is vital for taxpayers. We’ll provide updates on regulatory shifts but staying informed about these changes is essential for anticipating their impact on cryptocurrency taxation.

To ensure that you’re staying compliant, involve a professional in your tax planning. Get in touch here.

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5 February 2024

Understanding the CIS Reverse Charge in Construction

Explore the CIS Reverse Charge, transforming VAT accounting in UK construction since March 1st, 2021. Learn its purpose, conditions, exceptions, and invoicing rules. Whether you’re a contractor or subcontractor, gain essential insights for VAT compliance.

What is the CIS Reverse Charge?

The Construction Industry Scheme (CIS) Reverse Charge is a significant alteration in VAT accounting within the UK construction sector. Initiated on 1st March 2021, this procedure changes the usual VAT accounting process, where now, in specific transactions within the construction industry, the buyer (contractor) is responsible for the VAT instead of the supplier (subcontractor).

The Aim of CIS Reverse Charge?

The primary objective of the CIS reverse charge is to combat VAT fraud in the construction sector. It aims to reduce tax evasion and improve compliance within the construction industry by shifting the VAT payment responsibility from subcontractors to contractors.

This method prevents fraudulent activities, such as missing trader fraud, ensuring that VAT is correctly accounted for and paid to HMRC.

Key Conditions

The reverse charge should be applied when the following conditions are met:

  1. The supply is made for VAT of construction services and materials.
  2. The transaction is at a standard or reduced VAT rate.
  3. Both supplier and customer are UK VAT registered.
  4. Both parties are registered under the CIS.
  5. The customer plans to make an ongoing supply of construction services.
  6. The supplier and customer are not connected entities.
  7. The supplier is not an employment business, and the customer is not an end-user.

The Charge Does Not Apply To

The CIS reverse charge does not apply to:

  • VAT-exempt building and construction services.
  • Supplies outside the scope of CIS.
  • Purely staffing or worker supplies.
  • Supplies consisting only of materials.
  • Transactions made to non-VAT registered customers or end-users.

Included/Excluded Services

Included Services

Excluded Services

Construction, alteration, repair, extension, and demolition of buildings/structures. Drilling for or extracting oil or natural gas.
Work on land that forms part of the landscape, including infrastructure projects like roadworks, railways, and waterways. Mineral extraction and related underground construction activities.
Installation of essential systems (heating, lighting, air-conditioning, etc.) in buildings/structures. Manufacturing and delivery of building/engineering components or machinery.
Internal cleaning as part of construction or renovation projects. Professional services (architects, surveyors, interior/exterior design consultants).
Preparation or completion services like site clearance, excavation, foundation work, and landscaping. Artistic work installations (sculptures, murals) unrelated to construction.
Signwriting, signboard erection, and related advertising installations.
Installing non-essential fixtures (seating, blinds, shutters, security systems).

Invoices

When issuing invoices under the CIS reverse charge, it’s crucial to adhere to the following guidelines:

Standard VAT Invoice Details 

Ensure each invoice includes all the standard VAT invoice information.

Clear Indication of Reverse Charge

Make it crystal clear that the CIS reverse charge is in play. This means that the customer, not the supplier, takes responsibility for VAT accounting to HMRC.

VAT Amount or Rate

Specify the VAT amount or rate applicable under the reverse charge. Importantly, this doesn’t get added to the total charge to the customer.

Suggested Wording

Your invoices must feature specific wording to signal the application of the reverse charge. Here are some examples:

“Reverse charge: VAT Act 1994 Section 55A applies.”

“Reverse charge: Customer to pay VAT to HMRC.”

“Reverse charge: S55 VATA 94 applies.”

These words are your ticket to ensuring both parties understand their VAT responsibilities and deliver a clear advantage in compliance.

Example of CIS reverse charge

Participants:

  • Contractor (Company A): Building the new office.
  • Subcontractor (Company B): Specialised in electrical work.

Scenario:

Company A hires Company B for electrical work.

Company B invoices Company A for £10,000, stating the CIS reverse charge applies.

Company A, the contractor, records the £10,000 invoice as both input and output VAT.

Company A pays £10,000 to Company B, deducting £2,000 (20%) for CIS.

Company A remits the £2,000 CIS deduction to HMRC.

Company B reports the payment from Company A but doesn’t charge VAT.

This demonstrates how the CIS reverse charge shifts VAT responsibility to the contractor, ensuring proper tax compliance in construction projects.

How to Account for the Domestic Reverse Charge on Your VAT Return

The introduction of the domestic reverse charge necessitates specific adjustments in your VAT return filing:

Sales Invoices

When applying the domestic reverse charge to your sales, these should be recorded in box 6 of your VAT Return, indicating the value of the sales excluding VAT. There’s no need to enter anything in box 1 for these sales, as VAT accounting for them is the buyer’s responsibility.

Purchases Invoices

If you are purchasing services under the reverse charge as a contractor, you need to account for the VAT differently:

  • Output Tax in Box 1: Record the VAT due on these services as output tax in box 1.
  • Input Tax in Box 4: Similarly, claim the VAT on these purchases as input tax in box 4, which you normally do for standard VAT transactions.
  • VAT-Exclusive Value in Box 7: Enter the net value of these purchases in box 7, as you would with standard transactions.

As always, seeking guidance from a qualified accountant or tax professional is advisable. They can provide tailored advice and ensure your VAT Returns comply with HMRC regulations.

Need help with this? Contact us at Cloud Accountancy for expert advice on how to file your VAT return.



8 January 2024

Understanding and Mastering the Construction Industry Scheme

The UK’s Construction Industry Scheme (CIS) is more than just tax stuff. It’s the lifeline of your construction gig. Born in 1971 to outsmart the tax dodgers, CIS has become this big, complex beast that every contractor and subcontractor needs to tame.

Think of this guide as your handy map through the CIS jungle, helping you sidestep pitfalls, dodge hefty fines, and stay cool under HMRC’s watchful eye. We’re here to break down the tricky bits and show you how the right tech can make CIS a walk in the park.

What is the Construction Industry Scheme?

The Construction Industry Scheme (CIS) is a tax deduction scheme involving payments made by contractors to subcontractors in the UK construction industry.

Originating in 1971 to combat tax evasion, CIS has undergone various transformations, the most significant in 2007, to include more stringent requirements for contractors and subcontractors.

Under CIS, contractors deduct money from a subcontractor’s payments and pass it to HMRC, counting as advance payments towards the subcontractor’s tax and National Insurance.

It sounds simple, doesn’t it? In reality, CIS is complicated. Get it wrong, and you could be in for a big bill. Or even worse HMRC poking their nose into your business and having a big dig around. From experience you don’t want HMRC having a rifle through your business affairs!

The Complications of CIS

I’m going to get real with you for a moment. When new construction clients come to us, sorting out CIS mistakes and problems is probably our biggest money spinner. You could also say we are rather good at unpicking CIS problems…

CIS, while essential for tax compliance, presents numerous challenges:

Identifying CIS

Navigating CIS in the UK construction sector is crucial for tax compliance, but pinpointing which activities fall under its umbrella can be tricky, especially for property investors and developers. Sometimes us accountants even need to take advice on this.

For instance, property investment typically stays outside CIS unless construction spending surpasses £3 million within 12 months.

This means that careful monitoring of expenditures is essential to ensure compliance and avoid unexpected tax obligations. Yes, it’s the boring accountant in me coming out again. Good record keeping is not optional. It’s crucial to help you save money and make sure you keep your accountant happy.

Understanding Contractual Nuances

The contract’s nature significantly influences CIS applicability. Mixed contracts, blending CIS and non-CIS work, necessitate a thorough analysis. I’m giving my age away here, but I’ve been in the building trade for 30-odd years. Yes, I did start in the working world when I was very young. It’s fair to say ‘it’s grim up north’. Anyway, I digress, contracts in the construction industry are always changing and evolving. This a long way of saying, get advice! (Hint: we can help)

Understanding each contract’s intricacies is crucial to avoid non-compliance risks and financial consequences.

Defining Scope

In our experience, determining whether an activity is subject to CIS is a common hurdle for many in the construction and property sectors. Assumptions often lead to issues. Then issues often leads to large unexpected tax bills or, once again HMRC starting to poke their nose into your affairs. The only nose you want poking into your affairs is your accountants to help you run your business and keep your financial processes running smoothly!

One of the classic mistakes I see construction company owners make is win a contract and then just get started with it; rather than considering whether the lad (or person) you are taking on to support you with the contract is an employee or CIS contractor. For example, if you keep your best plasterer busy for a whole year and don’t work for someone else, HMRC could decide that they are an employee. There are legal ways to get around this problem, but get in touch for how we can help.

It’s vital to get expert advice to ensure your business aligns with CIS regulations, translating into smoother operations and a lower risk of penalties.

Registration and Compliance

Failure to register with HMRC can lead to significant fines. Non-registered contractors and subcontractors face steeper tax deduction rates and additional penalties. For example, if you are a cleaning company, then your cleaners actually come under the CIS scheme. Funny fact, not many accountants know this. And yes, I can be a real bore at parties…

Staying up-to-date with the latest CIS rules is not just good practice; it’s a critical defence against non-compliance’s financial and operational impacts.

Monthly Reporting

All payments to subcontractors, including those with gross payment status, must be meticulously reported in monthly CIS returns. Investing in robust record-keeping systems is advantageous, ensuring accuracy and compliance.

This means staying organised simplifies reporting and protects against potential discrepancies and penalties.

The revenue love fining construction companies. Failure to get your CIS scheme right and the revenue will happily fine you £100 a month per return that isn’t filed. The evil people they are is that if you fail to file your CIS return each month for 12 months, they will fine you £1200 up to a maximum of (at time of writing) of £7800. This really can kick you in your ‘backside’ if you get this wrong. I have successfully got these penalties cancelled. But don’t chance it; it needs strong mitigating evidence to cancel penalties. If I had a pound for every time I saw construction companies filing to get their CIS reporting done on time and correctly, I’d now be on a beach in Marbella sipping a cold beer.

Employment Status Verification

Correctly identifying the employment status of subcontractors is a crucial task for contractors. Errors in classification can lead to unexpected tax and National Insurance liabilities.

Diligent evaluation of each subcontractor’s status isn’t just about meeting CIS requirements; it’s a key aspect of maintaining financial health and regulatory compliance.

What Work is Subject to CIS, and What Work is Exempt?

Understanding what falls under CIS is vital. Generally, CIS covers most construction work, including site preparation, alterations, dismantling, construction, repairs, decorating, and demolition.

Exemptions include:

Professional Services: Roles like architects, surveyors, and some engineers and consultants.

Material Manufacture and Delivery: These are outside the CIS scope.

Non-Construction Site Services: Like canteen or facilities management.

Specific Exemptions: Work paid for by charities, educational bodies, or on the subcontractor’s own property under certain conditions.

Please find the list of exceptions on the HMRC website here.

A plea for you, don’t guess with this stuff. Take advice from an accountant who knows their way around the CIS scheme. The one short phone call to your accountant could save you lots of money in the future.

Reverse charge CIS

If you are in the middle of a chain of contractors, subcontractors and subcontractors, CIS gets a little more complicated. Very simply, don’t guess, give us a call and we will sort you out.

CIS and Gross Payment Status

Gross Payment Status enables subcontractors to receive full payment without initial deductions. Qualification requires passing business, turnover, and compliance tests.

Benefits for subcontractors include improved cash flow and simplified tax management, though rigorous adherence to tax obligations is necessary to maintain this status. As I have mentioned a few times penalties for getting this wrong can be onerous. I don’t care if I am repeating myself again (sorry, not sorry), but using Gross Payment status means contractors don’t get penalised if you get it wrong.

How Can CIS-Compatible Accounting Software Solve the Problem?

Modern CIS-compatible software addresses various CIS challenges:

Automated Verification and Tax Calculations

CIS-compatible software automates the verification of subcontractors with HMRC, ensuring they are registered and eligible for work under CIS.

This automation extends to the accurate calculation of tax deductions, significantly reducing the likelihood of errors.

This means contractors can focus more on their core business activities, knowing their tax compliance is accurately managed.

Efficient Record Keeping and Monthly Returns

These tools simplify the administrative workload by maintaining detailed transactions and subcontractor payment records.

They facilitate generating and submitting accurate monthly returns, ensuring they meet HMRC’s deadlines and requirements.

Efficient record-keeping is crucial, as it streamlines submissions and provides a reliable audit trail in inquiries or inspections.

Compliance Monitoring and Access to Real-Time Data

CIS software actively monitors compliance, providing timely alerts for upcoming deadlines and notifying users of legislative changes that might affect their operations.

This proactive approach ensures that businesses remain compliant and are not caught off-guard by new regulations or reporting requirements.

It also offers real-time access to data, allowing businesses to closely monitor their payments and compliance status, which is essential for effective financial management and planning.

Integration with Broader Accounting Functions

Integrating CIS operations with other financial aspects like VAT and payroll is another key feature of modern software.

This integration streamlines overall financial management, reducing the effort and time required to reconcile different accounting areas.

By aligning CIS with broader financial operations, businesses can achieve more cohesive and efficient financial management, leading to better-informed decision-making and a more comprehensive view of the company’s financial health.

We offer as a service for our clients to do CIS payroll, CIS filing and verifications to help take one of the headaches off your long to-do list. After all, why guess when we can help keep you and your business on the right side of HMRC. We also have a cost-effective service for your CIS contractors to help them legally keep their records, maximise their tax refund, and file their tax returns each year.

Should You Register for CIS? Act Now!

As a contractor in the construction industry, CIS registration is crucial for compliance and smooth business operations. Register today to avoid penalties and streamline your subcontractor payments.

Subcontractors, while not mandated to register, can benefit from lower tax deductions by registering. Don’t miss out on this financial advantage.

Need guidance? Reach out to us at Cloud Accountancy for expert advice on CIS and its impact on your business. 

Register now and ensure your business is compliant and efficient.

16 August 2022

Financial Planning to Ensure Financial Independence for Women

Financial independence is an important goal for many people. It means you have the ability to support yourself financially, without relying on others for assistance. It also means you control your finances because you make your own financial decisions, rather than someone else making them for you.

Regardless of who you are, financial independence makes it easier for you to achieve your dreams. It also gives you the peace of mind of knowing that you have the finances to live the life you want to live.

For women, financial independence can be more elusive, as women typically face financial hurdles such as lower pay, career gaps while they care for their families, and other financial barriers. Additionally, women generally live longer than men, so they must plan financially for longer periods, and they must have enough financial knowledge to make decisions on their own in the event their spouse dies before they do.

Here are ways women can effectively manage their finances and plan for the future.

Find an advisor you trust

Too many well-intentioned advice columns offer advice designed to “fix” women, focusing on what they do wrong with their money. This advice is outdated. You don’t need to be fixed, but you may need some guidance on what the best strategies are for you.

Find an advisor who is willing to guide you by respecting where you are, where you want to go, how you want to spend your money, and what your unique financial needs are. Choose an advisor who works with your personality, your goals, and your concerns, and takes your insights seriously.

Follow age-old advice

Regardless of your gender, there are some important steps that can help you obtain financial independence. These include:

  • Deciding what you want
  • Creating a budget
  • Setting aside a certain amount of savings
  • Having an emergency fund
  • Paying down debt.

Think of your retirement

Part of taking charge of your financial future is thinking about your retirement. If you work for a company that offers a retirement plan, take advantage of it. If you don’t, consider opening your own retirement savings accounts. The earlier you do it, the longer you have to save for your retirement, which is important because you could live well into your 90s.

Invest your money

You need money in savings but you also need your money working for you. That means investing. You don’t have to invest in risky stocks if that doesn’t suit your personality or meet your needs. But investing can bring you back a higher return than savings accounts will. A diversified portfolio will limit your exposure to losses and give you more potential for growth.

Have a comprehensive financial plan

A budget will help you with your monthly spending, but a comprehensive financial plan takes into account your entire situation, including your income, expenses, assets, investments, retirement needs, estate planning needs, income taxes, and how they work together to help you achieve your goals.

Financial independence involves you having the money you need to live the lifestyle you want, but it also means being confident in making your own financial decisions. It’s about having control over your money and making sure your money is working towards your goals.

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