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Markel Tax

11 Jun 2021

Cryptocurrency: A new wave of compliance activity

John Lewis has recently joined the investigations team at Markel Tax after nine years with HMRC in a variety of specialist roles. Most recently he worked within HMRC’s Fraud Investigation Service, handling Code of Practice 8 and Code of Practice 9 investigations.

Below he looks at two areas of compliance activity that has been of interest to HMRC in recent years and reflects on the modern world that we live in leading to the increased use of social media and, the innovation and development of cryptoassets or cryptocurrency. 

Let’s first of all consider the significant increase in the use of social media.

The social media world

To millions, social media is a key part of our everyday lives. It’s how we stay in touch with our friends and family, how we keep up to date on current affairs and document where we’ve been and what we’ve done.

And to some, it’s much more than that - it’s their livelihood, a way of life and their main source of income. These ‘influencers’ can be fantastically successful people of all ages and backgrounds, producing content on a regular basis about all manner of subjects such as  travel, animals, cosmetics and many, many more.

With that comes a number of potential income streams including income they receive from the platforms they use, their followers, the selling of merchandise as well as from third parties willing to pay or reward them for endorsements and/or advertising.

Whilst these individuals may have huge knowledge of their subject area, and know how to maximise their following by generating ‘likes’ using different hashtags and taking advantage of different algorithms, they may not be so familiar with their tax obligations.

Influencers are typically individuals so will need to notify HMRC of their liability within six months of the end of the tax year in which the activity began. They will then need to file self-assessment returns by 31 January following the end of the tax year in which the activity continued to take place. Those that are successful influencers are likely to achieve significant profits due to the limited costs involved in the activity, and so tax liabilities are likely to be substantial.

It follows that any penalty for failing to meet their tax obligations is likely to be significant as a result.
It is therefore vitally important to take the correct action at the right time. However, where this has been overlooked, Markel Tax can assist in seeking to address these issues with HMRC.

The rise of cryptoassets

Very little was known about this area a decade ago.  Cryptoassets, more commonly known as cryptocurrency, now appear to be at the forefront of business and commerce.  We see some of the world’s most valuable companies and some well-known individuals holding significant amounts of cryptoassets with others beginning to accept them as payment for the provision of goods or services.

HMRC does not consider cryptoassets to be currency or money, hence the terminology they have decided to use. They do, however, consider that any gains made on the disposal of these assets are taxable, and similarly, any genuine losses would be allowable. In the vast majority of cases, particularly for individuals, this will be under the Capital Gains Tax Regime.

Therefore, notifying HMRC of any gains or losses will typically follow the usual rules for individuals. You must notify your liability to tax on gains made within six months of the end of the tax year in which they arise. Losses however can be claimed up to four years after the end of the tax year in which the loss was made, but they must be claimed before they can be utilised.

To highlight the rise of this area, we note that one of the most well-known cryptoassets – Bitcoin – saw dramatic increases in value during 2017 and 2020. Investors stood to make significant gains if they had disposed of tokens during these periods. For the latter, there may still be time to notify HMRC of the liability to tax. For the former, a disclosure is likely to be required.   

What are HMRC doing in these areas? 

HMRC’s compliance activity in both of these areas is increasing with the tax authority keen to be at the forefront of these relatively new areas. It will likely use its bulk data-gathering powers under Schedule 23 of the Finance Act 2011 to approach data-holders to assist it in this regard. These data-holders are likely to include cryptoasset exchanges and social media platforms.

For example, Coinbase recently confirmed it had provided HMRC with data of its customers who received more than £5,000 from cryptoassets in the tax year ended 5 April 2020.

By being proactive in checking your clients’ tax affairs are in order with regard to this relatively new area of investment, making any voluntary disclosures where appropriate, this will significantly reduce and penalties that HMRC may seek to impose.

The team at Markel Tax have a great deal of experience in assisting in any necessary disclosures to be made to HMRC achieving the best possible outcome for the clients we represent.   

We can also help with any late claims for Capital Gains losses. Whilst the recent Budget did not increase the rates for Capital Gains Tax, the recent report by the Office for Tax Simplification makes it clear that the rates are likely to remain under review and we may see some changes in the near future.  With that in mind, ensuring Capital Losses are claimed correctly is a vital and prudent approach.

For more information and any assistance on the above topics please contact John Lewis at John.Lewis@markel.com.

Tagged Tax investigations
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