Was Albania’s Favourite Comedian Short-Changed By The Court Of Appeal?

Nothing in this paper is to be regarded as advice, let alone advice on investment in securities; it is the author’s personal opinion and to assist in the explanation of the topic.

Just before Christmas 2018, HMRC dropped their views on the taxation of individuals investing in cryptoassets on to the internet[1].  It caught many by surprise.  Most individuals will not hold cryptoassets personally owing to the risks involved but will typically hold them through a limited company where an investment motive is harder to demonstrate.  HMRC have opined on the tax treatment of cryptoassets[2] held by businesses and companies, but one would usually expect HMRC to conclude a trading outcome.  However, in the case of ownership by an individual, HMRC argue cryptoassets will in certain circumstances be treated as investments[3].

What are Cryptoassets?

HMRC offer a brief description of different types of cryptoassets but are clear they are not akin to money.  Definitely.  Cannot be.  So, I looked to the Bank of England website[4], which seemed a very good place to start [5].  It starts with what is money?   From barter, via receipts for deposits of gold which were transferable by bearer, and one reaches1931 when England came off the gold standard, and the current position where money is a promise built on faith trust and pixie dust i.e. that the Bank of England supported by British taxpayers (why isn’t there a word for United Kingdomish or UKish?) will honour the obligations stated on the notes.   Certainly, given the quantum of US dollars in issue, the US dollar meets Tinkerbell’s famous maxim of faith, trust and pixie dust ($10.5 trillion on M2, $1.2 trillion in notes).

Looking at that definition, cryptoassets which are “exchange tokens” look very much like money.  The Bank of England helpfully has a view on that too which is:

“But cryptocurrencies aren’t like the cash we carry. They exist electronically and use a peer-to-peer system. There is no central bank or government to manage the system or step in if something goes wrong.

Some people find this appealing because they think they have more control over their funds but in reality, there are significant risks. With no banks or central authority protecting you, if your funds are stolen, no one is responsible for helping you get your money back.”

I think this is an over-simplification.  There is no central bank for that most common form of currency, well known by lawyers and very usefully zero-rated for VAT purposes, the humble peppercorn (green, white, black or pink), and they have been used for centuries.  Ditto bartering, also done for years.  Ditto the Roman Empire coinage, backed by gold.  I would accept that to be a “currency” or for it to be legal tender (i.e. something a seller cannot refuse as payment, or a bank as  repayment of a loan) you need a Central Bank, but by that reasoning, Scottish bank notes issued by Scottish banks (all now in private hands, although the Royal Bank of Scotland, that paragon of stereotypical Scottish financial cautiousness, is still majority owned by UKFI[6]) are also not currency.

Technically, you are not obliged to accept any Scottish notes, but if people understood more about what money was, then they would realise that when accepting (without knowing) that they are hoping that the Bank of England and its English, Welsh, Scottish and Northern Irish taxpayers, will be their Tinkerbell.  Post Scottish Independence, guaranteed if the English are allowed to vote (like Sudetenland in 1938[7], probably one of the top ten darkest moments in UK history) in reverse. Scotland would have to create a new Bank of Scotland / Royal Bank of Scotland / Sevco Bank of Scotland, capitalised by Scottish resources and backed by Scottish taxpayers[8].   One should remember that this state of affairs arose to the bailout of the Bank of Scotland in 1707[9]; bailing out banks is nothing new.

Ecuador, having failed several times to manage a currency of its own, has adopted the US Dollar.  This means that whilst the US Treasury fixes its interest rates,  Ecuador’s sovereign debt is not backed by the US Treasury as Lender of last resort, although US banks would be obliged to accept dollars bills from anyone.

Similarly, if Greece left the Euro, it could still use the Euro (but not print them or set its own interest rate), but instead of being backed by the ECB and the taxpayers of the Eurozone, it would be backed, like the old drachma, by the Bank of Greece and Greek taxpayers.

So, for my money, cryptoassets of the exchange token variety are certainly money, although not legal tender and arguably not a currency.

Apart from that, what else do HMRC think?

I say “think” because the paper of 19^th December 2018, is not a statement of practice, just an agreed position of a small number of officials, no better placed than you or I (and if you have got this far you must have some expertise in the subject-matter, or in need of sleeping aids), to answer the questions objectively (the document has a whiff of political interference).

This is where, I think Albania’s favourite comedian, may have been short changed by the Court of Appeal which overturned the High Court decision of Goff J[10].

Let’s look at some criterion in table format.

Relevant factor	Cryptoassets Y/N	Silver	Norman Silver	Equities	Investment V Trade	Norman V CIR
Badges of trade
Income producing	N	N	N	Y	Investments 0 Trade 1	Norman 0 – 1 CIR
Pride of possession	N	N	N	N	Investments 0 Trade 0	Norman 0 – 1 CIR
Repeated transactions	?	?	Two in two years	?	Depends upon facts Investments 0 Trade 0	Norman 1- 0 CIR
Intention to make a profit	Y	Y	? Intention to hedge assets vs devaluation	Y	Daft, who buys non-depreciating assets in the hope of making a loss unless as a matching a hedge?	Norman 1 – 0 CIR
Relevant factor
Similar transactions to existing trade	?	?	N	?	Depends upon facts Investments 0 Trade 0	Norman 1- 0 CIR
Borrowed funds which can only be repaid by sale*	?	?	Y	?	Depends upon facts Investments 0 Trade 0	Norman 0 -1 CIR
Modified or improved?	N	N	N	N	Investments 1 Trade 0	Norman 1 – 0 CIR
Was the sale typical of trade or sell only in emergency**	?	?	Are two sales and two purchases enough?	?	Depends upon facts Investments 0 Trade 0	Norman 0 – 0 CIR
Length of ownership***	?	?	?	?	Depends upon facts Investments 0 Trade 0	Norman 0 – 0 CIR
Acquired by way of gift or inheritance	?	?	N	?	Depends upon facts Investments 0 Trade 0	Norman 0 – 1 CIR
Other criteria
Can be provided for security	Y	Y	Y	Y	Investments 0 Trade 0	Norman 0 – 0 CIR
Capital at risk?	Y	Y	Y	Y	Investments 0 Trade 0	Norman 0 – 0 CIR
Can be lent	Y	Y	Y	Y	Investments 0 Trade 0	Norman 0 – 0 CIR
Can be sold	Y	Y	Y	Y	Investments 0 Trade 0 Norman 0 – 0	Norman 0 – 0 CIR
Final Scores					Investments 1 Trade 0	Norman 4 – 4 CIR

*But this is the case for many property investments and something the Court of Appeal put a lot of weight upon the associated borrowing

** and *** Not happy with these tests; I have many clients who have bought assets as long-term investments only to find in months, that someone makes a ridiculous offer for the whole portfolio, e.g. six large stores, 75% senior debt, 20% other debt, 5% equity and within 6 months offered, and with some hesitation as pulling together the funding was not easy at the time, a 40% profit, which increased their equity 6.4 times over!   Even I was saying accept it.  Investors could be annoyed at having invested for the long term, but the return in such a short space of time was too good to refuse.

So, there is also more to length of ownership than meets the eye.  If you have an investment, at any given point of time there are only two things you can do, hold or sell.

While I have given each category one point each, in practice a court would give the appropriate weighting to each test.  In Wisdom v Chamberlain, the Court of Appeal focussed on income producing (not); pride of possession (none); repeated transactions (arguable); intention to make a profit (yes); and borrowed funds which can only be repaid by sale.

So how does HMRC’s view match up to this?

First, a reminder: the document released on 19^th December 2018, less than a week before Christmas, (there was obviously no bad news to bury it under) and appears to have no official status except as a point of view.  Second, this is not binding on anyone, not even HMRC, unlike Revenue Brief 9/2014, which covers mainly companies but also individuals and somewhat strangely, is not mentioned at all in the December 2018 paper. HMRC states:

“In the vast majority of cases, individuals hold cryptoassets as a personal investment, usually for capital appreciation in its value or to make particular purchases.”

So, did Mr. Wisdom; but that did not seem to count for much in 1969.

The document continues:

“Only in exceptional circumstances would HMRC expect individuals to buy and sell cryptoassets with such frequency, level of organisation and sophistication that the activity amounts to a financial trade in itself.”

Regrettably this is often true.  This is a market where you need to KNOW what you are doing.   It reminds me of an under 16 year old poker ace, who would wait for 11pm Friday night, when grown men (always men) would get home, drunk from the pub go online, think they are poker gods and then be completely cleaned out.   Same with Bitcoin except these people are sober and still cleaned out.

Similarly, anyone who borrows to fund their purchase, in my honest risk averse opinion, does not need a tax adviser, but sectioning under the Mental Health Acts 1983 to 2017.

Furthermore:

“HMRC does not consider the buying and selling of cryptoassets to be the same as gambling”.

Oops!   So many believe the opposite to be the gospel truth, partly because they really do want it to be true and partly because of what HMRC said in their Brief 09/2014, based on some specious arguments.  On this I agree with HMRC; but of course, spread betting was believed to be betting until it was pointed out that it was a contract for difference and that the betting business had to be authorised by the FCA.

In HMRC’s view:

“If the mining activity does not amount to a trade, the pound sterling value (at the time of receipt) of any cryptoassets awarded for successful mining will be taxable as income (miscellaneous income) with any appropriate expenses reducing the amount chargeable.

The other taxable income: HS325 Self-Assessment helpsheet has more information about miscellaneous income.

If the individual keeps the awarded assets, they may have to pay Capital Gains Tax when they later dispose of them.”

My view is that this is a trade, but I certainly agree that the other income charge[11] applies in default.  Although this does, in part, contradict the rest of the document and other tax provisions, e.g. individual taxed on intellectual property (until they are dead), the need for s.431 ITEPA[12] etc.

“If the individual receives cryptoassets as payment for the services provided then any increase in value from the time of acquisition will either give rise to a chargeable gain on disposal for Capital Gains Tax purposes or, in the case of a trade, get taken into account in computing any trading profits”

Really?  I am pretty sure if a client paid me in Bitcoin (or shares) for my services that HMRC would expect me to value them at the year end (like closing WIP) and ask for the income tax on it; but if that does happen, I will take HMRC’s line.  Basically, this seems to contradict everything we have previously known.  Of course, the real revenue risk is that I accept £10,000 worth of Bitcoin, and they fall in value to £1,000, and as always HMRC will see it as their loss of the tax on that amount, whereas I bear the full loss.

“Cryptoassets are digital and therefore intangible, but count as a ‘chargeable asset’ for Capital Gains Tax if they’re both:

• capable of being owned
• have a value that can be realised.”

 So, in Revenue and Customs Brief 9 of 2014, why are Cryptoassets not within the intangibles tax regime but are in the capital gains regime?  They cannot be grandfathered as pre 1 April 2002 assets?   What is the law behind this view?   Intangible assets are also capable of being owned (if they cannot then HMRC have a much bigger problem) and certainly for cryptoassets like Bitcoin, have an ascertainable value.

“Pooling under section 104 Taxation of Capital Gains Act 1992 allows for simpler Capital Gains Tax calculations. Pooling applies to shares and securities of companies and also “any other assets where they are of a nature to be dealt in without identifying the particular assets disposed of or acquired”

 So, let me get this straight.   Bitcoin is not money or currency but is akin to securities??   Bitcoin is not a membership; Bitcoin is an asset in itself, an intangible one.  Good luck to HMRC with this one before a court.

What if Bitcoin is money?

 If Bitcoin, and similar, is money, then life is much simpler.  The principle in Bentley v Pike[13] would apply in calculating any gain or loss on disposal, in the same way it does for US dollars or any other foreign currency.  A very anglo-centric decision but that is how it goes.  The VAT treatment in Revenue Brief 9 of 2014 would be exempt not taxable.

Conclusion

As you can see, with a few hours thought, one can come up with lots of arguments against HMRC’s view.  HMRC’s views are very favourable (except for the “this is not gambling” part) but then again; I share their view; this is no more gambling than buying shares in a bricks and mortar retailer, where unless you are shorting the stock, you too need to see a mental health expert.[14]

I also believe that, on the basis of the law, and not some views of a few civil servants, that Bitcoin is more akin to money and that this speculation is more in the nature of trading than investing in the stock market, but can, per HMRC, be held as an investment. Comparing cryptoassets to silver, it would appear that the late great Sir Norman Wisdom had a harsh deal from the courts.   If Bitcoin etc. are capable of being investments, then surely silver bullion can be?  If these are, indeed, HMRC’s views of the law then at the very least they owe Sir Norman’s estate an apology.]

I would recommend HMRC focus on economic reality but as Megarry VC said in Marson v Morton and Others [1986] 59TC381 the Vice-Chancellor stated at page 391:

‘It is clear that the question of whether or not there has been an adventure in the nature of trade depends on all the facts and circumstances of each particular case and depends on the interaction between the various factors that are present in any given case’

However, any half decent brief could have a field day out of this, and I am sure they will.

If HMRC believe that their paper of 19^th December 2018 represents current law, then a lot of taxpayers will use this favourable pronouncement and Mr. Norman’s estate should see if it can make a very late claim.

RIP Sir Norman Joseph Wisdom.   Maybe, one day, Lady Justice will vindicate you.

To be clear, nothing in this paper is to be regarded as advice, let alone advice on investment in securities; it is the author’s personal opinion and to assist in the explanation of the topic.

February 2019.

References

[1] https://www.gov.uk/government/publications/tax-on-cryptoassets/cryptoassets-for-individuals

[2] HMRC Revenue Brief 9/2014

[3] https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies#vat-treatment-of-bitcoin-and-similar-cryptocurrencies

[4] https://www.bankofengland.co.uk/knowledgebank/what-is-money

[5] As per Maria singing “Doh ray me” in the “Sound of Music” (Rodgers and Hammerstein)

[6] http://www.ukfi.co.uk

[7] See the Munich Agreement of 1938, to which Czechoslovakia, which is where Sudetenland was back then, was not even invited to sign

[8] These already exist and  pay income tax at the Scottish rate (introduced by the Scotland Act 2016) which for 2019/20 will be 1% lower for those earning up to £14,549 and 1% higher for those earning more than £24,944

[9] See the Darien affair, do not google “Panama Crisis”, as there have been a few!

[10] See Wisdom v Chamberlain [1969] All ER 332.  Norman Wisdom was the taxpayer, Chamberlain, the tax inspector

[11] ITTOIA 2005, S.637

[12] Shares etc. received by virtue of employment

[13] 53 TC 590

[14] Mental Health Acts 1983 to 2017