The brief states that income received from Bitcoin ‘mining’ activities (which generate the virtual currency) will generally be outside the scope of VAT. This is on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.

Income received by miners for other activities, such as for the provision of services in connection with the verification of specific transactions for which specific charges are made, will be exempt from VAT under Article 135(1)(d) of the EU VAT Directive as falling within the definition of 'transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments.'

When Bitcoin is exchanged for sterling or for foreign currencies, such as euros or dollars, no VAT will be due on the value of the Bitcoins themselves. Charges (in whatever form) made over and above the value of the Bitcoin for arranging or carrying out any transactions in Bitcoin will also be exempt from VAT.

However, HMRC makes clear that in all instances VAT will be due in the normal way from suppliers of any goods or services sold in exchange for Bitcoin or other similar cryptocurrency. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.

Bill Dodwell, head of tax policy at Deloitte, said: ‘Charging VAT on the gross value of Bitcoin sold to consumers makes little sense – as it would make it uneconomic for traders to operate in the UK and would simply drive the market offshore.  It would therefore be sensible to exempt Bitcoin from VAT – which would also have the benefit of reducing the scope for VAT fraud.’

HMRC says that whether Bitcoin and other similar cryptocurrencies will be subject to corporation tax, income tax or capital gains tax will depend on the activities and the parties involved, and whether any profit or gain is chargeable or any loss is allowable will be looked at on a case-by-case basis. For businesses which accept payment for goods or services in Bitcoin there is no change to when revenue is recognised or how taxable profits are calculated.

With regard to corporation tax, the general rules on foreign exchange and loan relationships will apply and HMRC says that at this stage it has not identified any need to consider bespoke rules. The profits and losses of a non-incorporated business on Bitcoin transactions must be reflected in their accounts and will be taxable on normal income tax rules. Gains and losses incurred on Bitcoin or other cryptocurrencies are chargeable or allowable for capital gains tax if they accrue to an individual or, for corporation tax on chargeable gains if they accrue to a company.

Given the evolutionary nature of cryptocurrencies, HMRC has indicated it will be issuing further guidance as appropriate. Revenue & Customs Brief 09/14 is here: http://www.hmrc.gov.uk/briefs/vat/brief0914.htm