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. 

Call us on 01617 985789

Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb

Other News

20 January 2025

Getting VAT wrong nearly cost this client over £100k

We’ve all had those moments where everything seems to be going smoothly, then the rug gets pulled out from under you. For one of my clients, this rug was more of a carpet – a posh, expensive one – that had been soiled by years of neglect, bad luck, and some unfortunate decisions. The story starts with a bloke who had his head in the clouds, making more money than he could keep track of, but found himself in a right financial mess. If you’re in the property business, particularly dealing with VAT compliance, this might hit closer to home than you’d like.

Let’s set the scene: a successful property business owner who could easily pay his bills with his spare change, was too busy living the high life to bother with the donkey work, like his finances. If he needed something done, he signed the papers and moved on, trusting the details to take care of themselves. It worked – until it didn’t.

The vision was a hotel turned luxury block of flats in a prime spot for the ultra-wealthy. Two top-end penthouses, four slightly smaller ones, and then a collection of swanky apartments. He’d even secured a 12-month option on the hotel. The architect assured him planning permission was a done deal, so he forked out over £100k into getting the plans drawn up. With what he thought was planning permission in hand, he approached a funder who was ready to give him over £14 million. There was just one minor problem, the architect had jumped the gun. The planning permission hadn’t actually been granted, and the whole deal collapsed like a house of cards. In the thick of Covid. Just to make matters a hundred times worse.

And it didn’t end there. His books hadn’t been touched for four years, so reclaiming the VAT became a ballache. And I won’t even go there with the state of his personal and corporate tax affairs. Which brings me on to why VAT compliance is so important.

Why VAT compliance matters

VAT compliance might not be the most thrilling part of running a property company by all means, but it’s one of those things you’ve got to get right. Mess it up, and you’re looking at penalties, investigations, or worse. It’s not just about avoiding trouble, either. Proper VAT management can save you a fair amount of cash, especially when you’ve got big projects on the go.

Common VAT mistakes in property

When it comes to VAT, property companies often trip over the same issues:

  1. Misunderstanding the option to tax: This is a big one. The option to tax can be a breakthrough in commercial property transactions, but if you don’t understand when and how to apply it, you’re setting yourself up for trouble.
  2. Misunderstanding the difference in VAT rates: Depending on the form of property the VAT rates differ. New buildings tend to come with a 5% VAT rate, whereas for longer existing buildings it’s the standard 20% VAT rate. Then there’s extensions, which could be either.
  3. Incorrect VAT treatment on sales and leases: Categorising supplies incorrectly – whether they’re standard-rated, zero-rated, or exempt – you best believe it’s going to attract HMRC’s attention.
  4. Reclaiming VAT on allowable expenses: Many property companies miss out on reclaiming VAT on legitimate expenses, like construction and maintenance costs. That’s money left on the table.
  5. Managing VAT in mixed-use developments: If your property has both residential and commercial elements, things can get tricky. Misallocating VAT in these scenarios can cost you dearly.
  6. Missing VAT exemptions: From new builds to residential conversions, there are exemptions available. Not knowing about them or applying them incorrectly can result in big tax bills.
  7. Errors in VAT on land transactions: Land transactions and leases are particularly tricky due to complex rules and specific circumstances. Knowing when VAT does and doesn’t apply will help you avoid costly errors with HMRC.
  8. VAT registration mistakes: Many property companies fail to register or register too late and end up with penalties from HMRC. You must register for VAT if your taxable turnover exceeds £85,000 in a 12-month period.
  9. Failing to keep proper VAT records: Poor record-keeping can cripple your VAT position. Without detailed records, how are you going to support your VAT claims or accurately report to HMRC?
  10. Errors in partial exemption calculations: When dealing with both VAT-exempt and VATable supplies, partial exemption rules come into play. Incorrect calculations of recoverable VAT leads to potential over or under claiming. Get it right to avoid HMRC issues.
  11. Failing to adjust for VAT on capital goods: Major refurbishments and equipment purchases fall under the Capital Goods Scheme. Neglecting to adjust your VAT returns can lead to incorrect claims and potential fines.
  12. Ignoring the importance of timely VAT returns and payments: Making sure your VAT returns and payments are on time is essential. Missing deadlines means penalties and interest charges, which will affect your cash flow whether you like it or not. Using accounting software (I recommend Quickbooks), setting up direct debits, or working with an accountant will help you stay on track and avoid late payments.

Rebuilding the books

So going back to my client story, after the deal collapse and four years of neglected accounts, my client had to get serious about sorting his finances. We rebuilt his books from scratch, digging through old records, finding missing paperwork, and piecing together his VAT reclaim. It wasn’t glamorous work, but someone had to do it. By the end of it, we’d turned an initial VAT reclaim of £38k into a whopping £130k – money that made a real difference in getting him back on track.

But, as you can imagine, this level of reclaim didn’t go unnoticed. This is HMRC we’re talking about, of course it triggered an investigation. Thankfully, we’d done the legwork, ensuring everything was above board. The key takeaway? If you’re going to reclaim significant amounts of VAT, make sure your records are immaculate.

Putting safeguards in place

With his finances back in order, it was time to ensure he didn’t end up in the same mess again. So I had to lay out a couple of ground rules. Starting with the non-negotiable, no major financial decisions to be made without consulting me. He had to give Cloud Accountancy full say-so of his finance department. All bills are to be paid through Apron (no more relying on the wife!). And most importantly develop a cash flow forecast and solid business plan to keep everything on track.

Lessons learned

The biggest takeaway from this client’s story is that success isn’t just about making money; it’s about managing it well. Here are some lessons worth noting:

  1. Don’t neglect your books: It’s tempting to let the paperwork pile up, especially when business is strong, but it will come back to bite you and it won’t be pretty.
  2. Understand the rules: VAT is tricky to get your head around, but ignoring it only multiplies the problems. If you’re unsure, get advice from someone who knows their stuff (i.e. me!).
  3. Keep records up to date: Whether it’s invoices, receipts, or bank statements, having everything in order can save you the misery if HMRC comes knocking.
  4. Plan for the worst: Covid was a wake-up call for many business owners. Building financial resilience isn’t optional; it’s essential.

Final thoughts

VAT compliance might not be the most exciting topic, but getting it right can mean the difference between thriving and just about surviving in the property game. Don’t let poor record-keeping or a lack of knowledge catch you out. And if you’re already in hot water, do something about it now. There’s always a way forward, it might just take a bit of graft (and the right people in your corner) to get there.

Need help with your VAT affairs or just fancy a chat over a brew? Give me a shout. If there’s one thing I’ve learned, it’s that no problem is impossible with the right approach – and maybe a mini dachshund like Toto by your side for moral support.

Interested to find out more?

Call us on 01617 985789

Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb

9 December 2024

5 Key Actions Needed to Sort Out a Car Crash of a Business

The Challenge

My client, let’s call him Dave, was pretty trusting with his money. He knew his accounts and bookkeeping were important. However, he left the financials to his other half, thinking all was ticking along fine and under control. By financials, I mean his wife ran his payroll, did his books and payments. In fact, there were many bank accounts that his wife was the only signatory for. After all, they were both in it together and wanted the same things. Didn’t they? 

But unfortunately, this wasn’t the case. As with many things, relationships often go well when the business and money is good. When Covid hit, many of Dave’s projects were put on a ‘stop’ and several large outstanding invoices were left ‘pending’. These were not the only serious issues Dave faced. He’d stopped looking at his finances and accounts. He just believed that his wife had it all in hand. His accounts were a mess and Dave didn’t know what he owed and how much he could take out of his bank account. A number of tax payments to the revenue had been missed and the brown envelopes were mounting up.

As you can imagine the pressure mounted up. As with many husband and wife teams, the relationship needs to be pretty strong to cope with a business under immense strain. Sadly for Dave, his wife decided to chuck him out and ask him for a divorce. I then get a very distressed phone call as Dave now realises that he hasn’t got access to his bank accounts and his wife is holding the dog and his passport as hostage until Dave agrees to her demands. By the way, no word of a lie, this part of the story is absolutely true. 

Oooops.

My approach

As an accountant with decades of experience of cleaning up messes often in hospitality and construction, you could call me an expert in this scenario. I will confess that sorting out husband and wife relationships are not my thing. But getting Dave back up and straightened out with the tax man and solvent again is my thing.

Here’s how I saved Dave and his firm from going under.

  1. Sorted the mess:
    First things first, I needed to get a handle on Dave’s finances and believe me this was not a straight-forward job. But it rarely ever is. Often the starting point with situations like this is to go back to a point where we are confident that the accounts are correct. In Dave’s situation this was the last 7 years. My team and I then practically rebuilt the books from the ground up. Thankfully we were able to get copies of his bank statements, sales invoices and most but not all of his receipts and purchase invoices. I’ll say one thing for his soon-to-be former wife, she did put Dave’s business onto the cloud, which meant once we had gained access to the accounts, we had most of the information we needed. Then, we went through his accounts with a fine-toothed comb, highlighted the inconsistencies and started to plan out corrective measures. 
  2. Dealt with the taxman:
    Tax issues? Yeah, he had them. Given that his accounts were, to put it simply, not a true and accurate reflection of his actual trading there were problems with VAT, CIS and his tax returns. When I had the accounts together I worked out what had or hadn’t been claimed and I put together a plan to get him square with the taxman. This is something we often do called ‘voluntary disclosure’. A voluntary disclosure means you are often on the front foot with the revenue and any fines levied are less than if the Revenue came after you. I’d like to say there were no fines involved. But I was able to plead significant mitigating circumstances – sometimes it is helpful for your wife to divorce you acrimoniously! These mitigating circumstances meant we were able to get a payment plan in place to make good the difference between the tax paid, the tax owed, the fines levied and what should have been paid. 
  3. Got the cash flowing:
    Cash flow in a construction business should be like a pint of cold beer after work on a Friday – smooth and forward-moving. Sadly, it rarely happens that way. What was needed was a bit of breathing space for Dave. So, I restructured the business’s cash flow strategy by renegotiating payment terms with lenders, got a short-term loan agreed and got some of the outstanding large invoices paid. It’s amazing how menacing Toto barking in the background can sound when on the phone to ask for payment on behalf of a client. This not only improved cash flow but when the large outstanding invoices started to be paid restored the lenders confidence. Win-win!
  4. Legal and debt management:
    With the tax issues came the legal headaches. Particularly with Dave needing to work out what his assets and income was as his wife’s divorce solicitor was going to be demanding this soon. Getting a new loan meant that Dave needed to take on more borrowing. However, we ran a cash flow forecast and looked at efficiencies within the business to ensure that Dave could pay back this loan AND also his other borrowings. We also needed to adjust the business shareholding so that his soon-to-be-ex-wife (who was resolutely not agreeing to shared access with the dog!!) no longer had any pecuniary interest or formal influence on the business. That took a little bit of delicate negotiation.
  5. Continuous support:
    Lastly, it wasn’t just a case of fixing it and leaving. We’ve now got an arrangement that consists of us doing his bookkeeping, keeping a tight handle on his cash, and regular reviews to keep things on track and prevent future problems. After all, Dave needed a new finance department after he realised his wife had ‘resigned’ from that role!

The Result

With a bit of hard graft and some sharpness, we managed to turn it around:

  • Dave dodged a large bullet with the taxman. Although his fines were much smaller than first thought.
  • Got his cash flow moving again. 
  • Saved his business and also removed his soon-to-be-former wife from his business affairs.

Key Takeaways

There’s several lessons learnt here:

  • Stay in the know: Don’t leave your finances till the last minute. Keep your eye on the ball.
    • Don’t be too trusting. Always make sure that regardless of who is doing the invoicing, bookkeeping and payments that, you do regular reviews of what is happening.
  • Get help before you’re in too deep: Got financial worries? Get hold of expert financial advice. There’s a time and a place for it to be handled amateurishly; dealing with HMRC is not one of them.
  • Be proactive: Dealing with issues promptly prevents things from escalating. Definitely don’t ignore brown envelopes.
  • Cash matters: Keep the cash flowing. No cash flow, no business.

Conclusion

Bad things happen, even to the best of us. But with the right accountants behind you, you can pull through anything—just like Dave did. 

So, moral of the story: Don’t be too trusting and if your finances are looking a bit off, don’t hesitate to give me a shout. Let’s get you sorted before the ref blows the whistle.

11 November 2024

HMRC Nudge Letter: Don’t ignore it!

We’ve all had those moments where a letter drops through the letterbox and you instantly get that horrible sinking feeling in your stomach. For many construction business owners, that dreaded letter comes from HMRC. It’s a nudge letter, a not-so-subtle reminder that your tax affairs might not be as squeaky clean as you’d hoped.

Why the nudge?

Unfortunately, HMRC aren’t just sitting around twiddling their thumbs. Their advanced systems can spot a discrepancy a mile away, with accuracy. If you’ve been a bit sloppy in your record-keeping or missed a few deadlines, you might find yourself on their hit list.

Common reasons for nudge letters in construction:

  • CIS antics: Errors in CIS returns or payments to subcontractors can trigger a nudge. It’s important to understand CIS and its complexities fully. If you need a hand with this give me a shout, alternatively, I’ve covered CIS in a previous blog. You can read it here.
  • VAT issues: Incorrect VAT returns, especially for construction-specific schemes like the reverse charge.
  • Income and expenditure mismatch: Discrepancies between your reported income and expenses.

A real-life example

One of my clients received a nudge letter from HMRC. At first, he was a bit flustered. After all, he’d been running his construction business for years and thought he had everything under control. But as I went through his records, I discovered a few minor errors that could have led to significant tax penalties.

If you know me, you know I’m not one to shy away from dealing with HMRC. So, I quickly got to work, reviewing his records, finding the errors, and communicating with HMRC to address their concerns. Luckily, thanks to swift response, we were able to resolve the issue with a slap on the hand and no major consequences.

Luckily, he had me (a tax professional that specialises in construction) at hand to handle it promptly. However, if you don’t already have an accountant I would strongly recommend following the steps below as soon as possible.

How to respond to a nudge letter

  1. Don’t panic: It’s easier said than done, but it won’t change anything. So, take a deep breath and assess the situation calmly.
  2. Seek professional advice: Consult with a qualified accountant, preferably with years of industry-specific experience, to help you understand the implications and come up with a strategy to get you out of the mess.
  3. Gather your records: Gather all relevant financial documents, such as invoices, receipts, and bank statements. You know the drill.
  4. Communicate with HMRC: Respond to HMRC promptly and provide any requested information. Don’t gatekeep anything or try to outsmart them, hand over whatever they ask for.
  5. Consider a voluntary disclosure: If you’ve made significant errors, a voluntary disclosure may be a viable option. By doing this, you’re showing full transparency and cooperation with HMRC, which could work in your favour and result in reduced penalties and prevention of prosecution.

Remember: This is not a time to DIY it.

Avoiding future nudge letters

Construction is one of the most time-demanding industries, so falling behind on the financial side of things is something I see and deal with often. Making sure you set time aside each month to check your books are up-to-date will help to avoid a run in with the tax man. If you really don’t think you have time to do this, it probably means it’s time to look for an accountant that can take the weight off your shoulders.

To avoid future HMRC scrutiny, consider these tips:

  • Keep accurate records: Maintain detailed records of all financial transactions. From paying subcontractors and employee wages, to purchasing materials and site expenses.
  • File tax returns on time: Set reminders and consider using tax software to automate the process. My real preference is Quickbooks.
  • Seek professional advice: Consult with a qualified accountant to ensure compliance with tax regulations.
  • Stay updated: Keep ahead of changes in tax laws and regulations.
  • Improve financial discipline: Establish effective systems to track income, expenses, and tax requirements.

Don’t forget, a timely response to an HMRC nudge letter can save you time, money, and stress. Don’t push it aside or ignore it, unless you want the situation and repercussions to escalate.

Consequences of ignoring a nudge letter

Ignoring an HMRC nudge letter can lead to serious consequences, including:

  • Increased penalties: HMRC may impose hefty fines for late or inaccurate tax returns.
  • Deeper investigations: A nudge letter can trigger a more thorough investigation into your tax affairs. You might not want them to see that pricey Christmas present that you got your other half in your expenses…
  • Potential legal action: In severe cases, tax evasion can lead to legal action. Do you throw away all the effort and time you’ve put into your business by damaging your reputation?

Don’t let a simple oversight turn into a major headache. If you receive a nudge letter, take immediate action. Consult with a tax professional to understand the implications and develop a strategy to resolve the issue.

Need help with your tax affairs? Let’s chat over a cuppa.

 

Interested to find out more?

Call us on 01617 985789

Or book a meeting at https://calendly.com/d/ckfd-tzk-zbb

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