It is apparent that HMRC may have misclassified Bitcoin in the UK as a Single Purpose Face Value voucher meaning that VAT will need to be charged on the sale of Bitcoin subject to the seller meeting the VAT registration requirements. However, HMRC seem to be prepared to consider a re-classification of Bitcoin and interested parties are currently in talks with HMRC about this.
Crucially, it is important for minimal work to be involved for HMRC to re-classify Bitcoin in its correct place. It may require too much political capital to invent Bitcoin specific terminology or define it, as has done Bafin in Germany, as ‘private money’. On this basis, HMRC may still be able to categorise Bitcoin as a Face Value voucher, as defined in Schedule 10a of the VAT Act 2004, but specifically as a Credit Voucher. This may be the most pragmatic way forward.
In more detail, if we look at the wording of the VAT Act 1994, a Credit Voucher is disregarded from the scope of the legislation. In the words of HMRC: “All the consideration for all supplies of credit vouchers is currently disregarded with VAT being brought to account by the redeemer when the vouchers are exchanged for goods or services“.
One can postulate that the rationale seems to be that the purchaser of the voucher will pay VAT in respect of the goods that he/she ultimately purchases, so, for example, someone buys a BTC then goes into a pub to buy a pint in BTC, the pub will charge VAT on the pint and therefore account for VAT on the supply of goods. Also, Credit Vouchers are possibly treated as an exemption due to the fact that they can be used against any types of goods and/or services and that those goods/services will be subject to varying rates of VAT.
It is interesting to note a 2012 decision of the Court of Justice of the European Union (CJEU)against the UK, which forced the UK to change its VAT rules in relation to Single Use vouchers. The CJEU found that single use vouchers should be VATable on issue. This decision was to prevent VAT avoidance. This decision may have encouraged HMRC to take a conservative stance with regards to Bitcoin. However, it is clear that Bitcoin is not single use, as you can use it to purchase a variety of goods and services (A single use voucher would be say a phone card issued by a telecommunications company.)
Update on 12 December 2013 – Following a meeting with interested parties HMRC have decided to apply a different category from ‘vouchers’ to Bitcoin.