HM Revenue & Customs (HMRC) stated during a meeting with a group of UK traders last week that it would not impose a 20% Value Added Tax (VAT) on relevant transactions. Previously, these entrepreneurs complained that VAT made their businesses globally uncompetitive. HMRC further stated that it would not impose the tax on their margins either.
This ruling avoids the question of whether to define Bitcoin as a currency, but in practice, it treats it as one; the ruling is based on European Union (EU) law regarding the exemption of payments and transfers of "negotiable instruments" from taxation.
Governments around the world are struggling with the challenge of how to handle virtual currencies. Meanwhile, some companies hoping to profit from a small but growing economic sector are lobbying to create a favorable regulatory environment for the flourishing of virtual currencies.
Singapore has already issued tax guidelines for Bitcoin, while domestic regulators in the United States have criticized the Internal Revenue Service (IRS) for failing to do so.
"If they had added VAT, it would have destroyed us; it would have made no sense to start this business," said Jonathan Harrison, who founded a startup dedicated to deploying Bitcoin ATMs in the UK. "Fortunately, the UK authorities view Bitcoin as an innovative technology that can contribute to the economy."
The European Banking Authority has warned that consumers are not protected by EU-mandated refund rights when using virtual currencies for commercial transactions. China has banned domestic banks from handling Bitcoin, while Russia and Vietnam have declared Bitcoin transactions illegal.
The UK tax authority's decision comes as the non-profit advocacy group "Bitcoin Foundation" told the Financial Times that it will relocate from the United States to the UK this spring. Edward Snowden's revelations about the US government's internet espionage activities, combined with the UK's status as an active financial technology (fin-tech) hub, have led some Bitcoin users to consider the UK a more favorable jurisdiction.
The Bitcoin Foundation was established to develop the software that runs Bitcoin and to lobby regulators. According to Jon Matonis, Executive Director of the Foundation's Board, the foundation is currently looking for staff and office space in London.
Last year, HMRC defined Bitcoin as a voucher and imposed VAT on the value of the coins themselves. UK businesses protested this treatment. After several meetings held throughout last year, HMRC withdrew this guidance.