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UK tax authorities ready to exempt bitcoin trading from VAT, according to press reports

Trading in the bitcoin 'virtual currency' is set to become exempt from VAT in the UK following negotiations between traders and HM Revenue and Customs (HMRC), according to press reports.

The Financial Times said that the new policy would not result in bitcoin being reclassified as a currency, but would allow it to be treated in an equivalent way for tax purposes. It would be based on provisions in the VAT Directive that exempt payments and transfers of "negotiable instruments" from the tax.

"HMRC has been working closely with the bitcoin industry on the tax treatment of trading in bitcoins and commission," the department said in a statement. "We will be issuing guidance shortly."

According to the FT, HMRC also plans to stop charging VAT on margins. Corporation tax and other taxes, for example capital gains tax on profits made from bitcoin trading, would still apply.

Bitcoin is a digital asset with a monetary value but which is currently not recognised as an official currency anywhere in the world. Some retailers accept payment by bitcoin for goods and services but most traders, especially in the EU, have not yet put systems in place to accept bitcoins in transactions.

A recent report by Bank of America Merrill Lynch in the US said that bitcoin could potentially "become a major means of payment for e-commerce", but said that the "high volatility" of its value was "hindering its general acceptance as a means of payments for online commerce". Virtual currencies are not currently regulated anywhere in the EU, and national governments have expressed concerns that they could be used for tax evasion and money laundering.

HMRC originally classified bitcoin as a voucher and charged VAT on its value when it was traded or sold. However it withdrew this guidance last year following industry concerns that doing so would drive customers to countries that did not tax the virtual currency. Germany, for example, classifies bitcoin as 'private money', which means that VAT is only charged on the commission charged by trading exchanges when bitcoin is traded.

VAT expert Darren Mellor-Clark of Pinsent Masons, the law firm behind Out-Law.com, said that the discussions showed the UK's "continuing determination to place itself among the leaders in the taxation of technological and financial innovation".

"This development is, on the face of it, good news for those trading in and settling transactions with bitcoin," he said. "However, businesses would do well to remember the potential impact of VAT exemption on the recovery of VAT incurred on related costs - such as IT, premises, etc."

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