UK will benefit after ECJ VAT ruling over Bitcoin
The European Court of Justice (ECJ) ruling that trading in digital currencies such as Bitcoin, is VAT exempt, is a major step towards the development of the digital currency as an alternative currency, says Richard Asquith, vice president of global tax at Avalara
28 Oct 2015
The UK celebrated a victory of sorts in the last week as the EU’s highest court of appeal, the ECJ, ruled that trading in digital currencies is VAT exempt, on the basis that they are a method of payment. This victory, in line with HMRC’s view that Bitcoin is a ‘private currency’ will help secure the UK’s position as the emerging European and global hub for the sector, and will add to London’s ambitions as a FinTech leader.
In March 2014, HMRC took the view that Bitcoin is similar to a currency and thus not subject to VAT. This conflicted with some views in Europe, particularly in countries such as Germany, Poland and Sweden, who considered Bitcoin more like a commodity or goods used for barter, and so subject to VAT.
The average EU VAT rate is over 21%, so this would have rendered the exchange and use of bitcoin as subject to a substantial tax bill. In an attempt to resolve the dispute, Sweden asked the European Court of Justice to decide whether cryptocurrency exchanges were liable for VAT on the fees that they charge for their services.
Specifically, the ECJ was asked in July 2014 to clarify firstly whether Bitcoin exchange services fell within the scope of services under the EU VAT Directive Article 2(1); and secondly, if this was indeed the case, whether the trading and mining of bitcoin be VAT exempt under the Directive’s Article 135(1), and would VAT be due on the spread made in a trade?
The ECJ announced, in relation to Case C-264/14 Skatteverket v David Hedqvist, that Bitcoin is similar to fiat currencies, which are VAT exempt. This is under the provision concerning transactions relating to ‘currency, bank notes and coins used as legal tender’. It judged that digital currencies are effectively private money with no intrinsic value, like goods or commodities. This means their exchange is a financial service, similar to the exchange of national currencies, and thus VAT exempt.
The decision follows ECJ Advocate General Juliane Kokott’s non-binding opinion issued in July 2015, which indicated that Bitcoin should not be subject to VAT. Again, this opinion was on the basis that Bitcoin is comparable to money, which does not add value and so cannot be subject to VAT.
While good news for anyone interesting in buying or selling Bitcoin, the ruling also represents a far more significant boost for the role and development of virtual currencies as a viable alternative to established, national-controlled currencies.
The ruling is a particular boost to the UK as it will help ensure it realises its ambition to become the European and global Bitcoin trading centre. A VAT liability on this activity would have potentially destroyed the UK’s and ultimately the EU’s industry. As it is, the ruling will help boost the UK’s prospects of securing its position as the European and global hub for the bitcoin sector and means that all EU member states must now make the trading of virtual currencies VAT exempt.
If the VAT treatment of Bitcoin had remained uncertain, the UK risked losing out to intense competition from global exchanges such as Switzerland, Singapore and Hong Kong, which would no doubt threaten their market share with preferential capital gains regimes.
Aside from the exchange of digital currencies, the ruling also covers the creation or ‘mining’ of Bitcoin in the EU and is probably the major first step in securing bitcoin’s future as a genuine alternative to national currencies.
Bitcoin is still in the early stages of its journey to acceptance. While it’s popular with forward-thinking digital retailers who appreciate its instantaneous, low-cost transaction capabilities, the next stage in its development will be to receive regulatory compliance approval from national banks, such as the Bank of England and the Deutsche Bundesbank.
The ECJ ruling is laying strong foundations for this progression and will also give the wider general public greater confidence in adopting digital currencies for day-to-day use.
I also wouldn’t be surprised to see retailers and payment platforms step up their investment in bitcoin management in anticipation of proliferating bitcoin use between consumers and businesses.
About the author
Richard Asquith, vice president of global tax at Avalara