UK Tax Authority and Digital Goods

Fri, Feb 14, 2014 3-minute read

The biggest concern I have over the UK Tax authority (HMRC) and digital “currencies” is that they don’t seem to understand digital delivery, which already hurts UK businesses.

The main taxation on the sale of goods and services by companies in the UK is VAT - Value Added Tax. Like many other taxes on sales it’s imposed on anything a VAT registered UK company sells to certain groups (mainly UK consumers and companies, and EU consumers). Many UK companies don’t have a choice about whether they become VAT registered because there is a low limit to how much you can turnover before registration becomes compulsory.

Goods and services imported into the country should also have other taxes added to them to level the playing field, and, in the early 1970s, when VAT was introduced, and almost all imports were physical goods which could be checked at ports, airports, and via the limited number of courier companies that worked well.

Today, in the age of purely digital goods and services such as BitCoins, hosting, and virtual servers, there is a big problem; Nothing physical is delivered to consumers. The physical import checks being bypassed means UK consumers can to get access to those goods and services without HMRC being aware that they’re in use by a UK consumer.

Consumers should declare these “imports”, but I doubt many, if any, do. I suspect this is partly because they may not even know they have to report them, and partly because they don’t want to pay 20% for something the government adds little value to (unlike ports and airports which use government services like the police and traffic control systems, the security and running of the internet connections to and from the UK is almost exclusively funded and operated by commercial entities who have conditions imposed upon them).

This brings me to the current hot topic; Taxation of virtual “currencies”. There is talk of HMRC considering treating them as “assets” and getting UK companies to add VAT to their sale. This idea would be practically unworkable and damaging to UK businesses looking to pursue opportunities using them for the same reasons offering UK based hosting services is currently a hard task; Consumers can get easy access to the same service at essentially a tax-free price (i.e. 20% cheaper).

Here’s an example; If, as a UK consumer, I want to buy some bitcoins, where would I be most likely to buy them from; A UK company whose prices have to include a 20% tax, or from a company in a trusted country like the US, Canada, etc., who can provide them without the 20% tax? Some people will go for the comfort of a UK company, but I suspect most would go for the cheaper option.

What can be done about it? In short, not much because trying to detect digital goods and services is extremely difficult. The HMRC would need access to bank and credit card records and flag companies known to provide those services from abroad. That’s a big task, and one with a lot of privacy issues, but it’s about the only way to reliably track down such purchases, and without it UK business who have to apply a 20% tax are always going to be at a disadvantage.

Please Note : I’m not an accountant or tax expert, so you make any decisions made from the content of this post at your own risk.