Host

Philippa Lamb

Guests

• Richard Jones, Senior Technical Manager, Tax Policy, ICAEW
• Reuben Wales, Head of Financial Services, ICAEW
• Dion Seymour, Crypto and Digital Assets Technical Director, Andersen

Transcript

Philippa Lamb: Hello, welcome to Accountancy Insights. I’m Philippa Lamb. This is your monthly roundup of news for the accountancy profession. Today we’ll be discussing cryptoassets – how should they be treated for tax purposes? And suspicions of fraud – when should auditors act on them? Joining me is Richard Jones, Senior Technical Manager in Tax Policy at ICAEW; Dion Seymour, formerly of HMRC, now Crypto and Digital Assets Technical Director at tax services firm Anderson; and, on that fraud story, Reuben Wales, Head of Financial Services at ICAEW.

First up, Richard and Dion, we’re talking about the taxation of cryptoassets. Let’s just be clear up front, there is no such thing as a crypto tax, per se, as I understand it, so existing laws and principles apply to them in the same way as any other assets. So I guess Richard, my first question is, where will tax experts find the most recent guidance on this from HMRC?

Richard Jones: There is a cryptoasset manual, which is part of the general suite of manuals on the government website that was last updated last year. And there is more information as we’ll come on to talk about on ICAEW’s website and various other posts.

PL: That’s the first port of call. And HMRC doesn’t consider cryptoassets to be money, does it?

RJ: That’s right, and so as we’ve just said, you need to apply general principles. There isn’t a crypto tax as such, but there are some general principles, and one is that crypto isn’t currency, if you like. Even though sometimes it’s referred to as cryptocurrency from the perspective of the tax rules, it’s not considered to be money as such.

PL: So legislation referring to money doesn’t apply to cryptoassets?

RJ: That’s correct, yes.

PL: Dion, let’s talk about the taxation of individuals. How does that work?

Dion Seymour: Well, individuals can be taxed basically in a number of ways, and it will depend on what activities the individuals are actually engaged in. Cryptoassets are received as employment income and will be taxed in a similar way as other employment; they can be part of a trading income, miscellaneous income, or part of a capital gain. Now, obviously, if it’s part of employment income, and definitely if it’s received in connection with employment, then if the cryptoasset is considered to be what’s called a readily convertible asset, or an RCA, both the employee and the employer have to pay national insurance contributions, NICs, as well as the income tax, and PAYE – pay as you earn – must be operated by the firm that’s providing the cryptoassets as remuneration.

PL: How about miscellaneous income?

DS: Miscellaneous income is where cryptoassets are received, but the activity falls short of being considered to be trading, and this is certainly separate to employment income. And the income could be from things like mining cryptoassets, which many people know with Bitcoin. But more importantly, as it’s actually becoming more common, is what’s called proof of stake. So Ethereum, the other big cryptoasset that’s available – you can generate a return provided by almost an interest-like capacity. And as you’ve already said, crypto is not money, so it’s not interest – but you generate the return in that way, and then that would also be taxed through your miscellaneous income. So it can change, and you can get returns these days without mining.

PL: And that leaves us with capital gains, I think, doesn’t it?

DS: Fundamentally, yes. And after you’ve gone through the employment income, the miscellaneous income, capital gains is that catch-all bucket in terms of the legislation. Capital gains pooling rules – so section 104, TCGA 92 applies – and capital gains are chargeable on any transfer of one asset to another. So if you go from Bitcoin to Ethereum, then any gain that you make would be taxable, or losses actually be relievable. Both of those are considered to be separate assets, and so there isn’t this big pot for crypto – all to fit in there as one thing. Each separate one you get – so your Dogecoins, your Memecoins – they are all separate assets, and they all have to be accounted for and treated separately. So that can create some significant challenges to those who aren’t used to doing section 104 pooling calculations, and a recent TAXline article fully explains the situations in which a gain may arise.

PL: OK, we’ll link to that in the show notes. Anything to add on that, Richard?

RJ: I guess the next thing to talk about, perhaps, is around the taxation of companies, because similar principles apply here but there are some specific rules within the Corporation Tax Acts where you have to consider, well, how does crypto apply to that? I suppose the two main ones are, firstly, the loan relationship rules. We’ve already said a few times now that crypto isn’t money, and so the loan relationship rules specifically apply to money. And so, therefore, they don’t apply here. The other one, the tricky one, is around intangible fixed assets. The way those rules work largely depends on the accounting treatment. And under that as a broad rule of thumb – well, obviously you need to consider it on a case-by-case basis – a cryptoasset would be an intangible asset. That kind of feels right, but is it a fixed asset? And certainly, if you’re likely to be regularly acquiring and disposing of these assets, perhaps even to provide working capital to fund the business, then broadly speaking, that’s not going to be fixed as such, and so therefore falls out of those rules. So probably, when you look at it, the treatment for individuals and companies is fairly similar, but just having to apply these additional rules to see whether they apply or not

PL: And Dion, the final thought I have is – chargeable gains?

DS: Well, very similar to individuals. Section 104 pooling still applies, but there are slightly different anti-avoidance measures built into section 104 which differ between companies and between individuals; there are some slight nuances there.

PL: What about other forms of taxation? I’m thinking about things like stamp duty.

DS: It’s an interesting one that we actually have here, because cryptoassets are unlikely to fall within the assets classes subject to stamp duty – and there is an element here in the HMRC guidance. But it should be assessed on a case-by-case basis. Perhaps an article for another day is that the world of cryptoassets is changing. It’s not just like a currency, and you can actually have cryptoasset tokens that represent what are called real world assets, or RWAs, in the crypto world – and those could represent physical property. And so what actually happens with stamp duty in those circumstances is a question that’s been unanswered by HMRC guidance, and so we would have to go back to first principles.

PL: Is there any more clarity around that?

DS: Well, again, very limited guidance on VAT currently in the guidance. The manual states that VAT is due on pound sterling value of goods and services paid for with exchange tokens – exchange tokens are the ones being used for that means of transfer, like Bitcoin or Ethereum – but not on the transfer of the token itself. Other jurisdictions in Europe have been a bit more vocal as to the VAT positions there, and actually, VAT has got some interesting case law around it from European Court of Justice around what’s called the Hedqvist case, which means that crypto itself is generally going to be an exempt supply of itself. But again, you have to be looking at the circumstances that surround it.

PL: Now I know you both think accountants need to develop their knowledge in this area. What are your big concerns?

DS: I believe that unless you have a good understanding of cryptoassets, you may actually be misled by your client, whether that’s deliberate or otherwise. It’s a very dangerous area for taxpayers. They don’t understand tax, and sometimes the accountants won’t understand crypto. So you really do have to understand both aspects here – and agents may not actually be aware that cryptoassets actually fall within the tax system themselves, and this is a dangerous area.

PL: HMRC – they’re sending out a third round of nudge letters, aren’t they Richard?

RJ: A few years ago, HMRC started to work very much more around what they call upstream compliance, which is essentially that, rather than raising enquiries – obviously, they still do that – contacting taxpayers and agents to ask whether they think that particular taxpayer’s affairs are being dealt with correctly. And this is part of that they’ve previously been two other nudge letters. This one is slightly different, because this one does require a response, whether or not actually you as an individual, or a corporate, or your client has been dealing with their cryptoassets correctly from a tax perspective. So if you receive one of these yourself, in respect of your own tax affairs, or you have clients who receive them, we definitely recommend that you take them seriously and do check that your or their affairs are correct and respond appropriately, because HMRC is setting up a response team to deal with these responses. We understand that they’re not just going to go into a black hole and never to be dealt with again. So it is important that you do take those seriously.

PL: Richard, if listeners need more detail on this, where can they find that?

RJ: First of all, we’re running a series of articles in our tax publication TAXline which, again, you can find on ICAEW’s website. If you’re a member of the tax faculty, you should receive a copy of that or a link to it, at least, automatically. We’ve had the first article already published, and we’ve got two more on the way. And in addition, there are some TAXguides that were published earlier on this year, one for individuals and one for companies. And in those guides, we go into a lot more detail about the taxation treatment.

PL: I think you’re hosting a digital assets conference as well, aren’t you?

RJ: Yes, that’s right. That’s going to be on 29 of November. It’s an all-day event held at Chartered Accountants Hall, and more details on that will be available on our website very soon. So listeners should keep an eye out for that if they want to come along and learn more about not just the taxation of crypto, but lots of other aspects that accountants and advisers need to get up to speed on.

PL: Well, yes, it is a complex area. I think you both shed some light for us. I’m sure we’ll come back to it. Thanks both very much indeed.

On to suspicions of fraud now with Reuben Wales. Ruben, we are talking about auditors’ obligations to report those suspicions today because, as we know, it’s been in the news recently with substantial fines levied on firms who haven’t met their obligations. Should we do a quick recap for listeners? What do they need to keep in mind on this?

Reuben Wales: Well, there’s a rather well-known requirement in ISA 240 that all external auditors will be well aware of, which effectively states that the auditor’s primary obligation is to obtain reasonable assurance over financial statements to ensure they’re free of material misstatement, whether that’s caused by fraud or error. The key word here being, of course, ‘fraud’. So the requirements in 240 don’t expect all instances of fraud to be identified – the key word there being ‘material’ – but they should plan and execute the order in such a way as to put them in the best possible situation to identify those instances.

PL: And before we get into the detail of that, there is a legal obligation here too, isn’t there?

RW: Yes. So under the Financial Services and Markets Act, also known as FISMA, auditors of regulated entities – in this instance, that’s the FCA- and the PRA-regulated space – are required to disclose information or opinions relevant to those regulators, and that includes suspicions of fraud.

PL: And is there additional guidance that auditors need to follow?

RW: Well, it’s important to think about why that requirement is in there in the first place and I would say, you know, auditors have privileged access to a range of information sources relating to the firm when they’re conducting that audit. That includes rather sensitive, confidential information; it puts them in a unique situation to identify fraud, and hence why that obligation exists between the auditor and the regulator. In terms of additional guidance, I would point auditors to ISA 250 (b), which sets out what they should do in an instance where there is an apparent breach of regulatory requirements, including where they suspect fraud. So they should really be looking at the available evidence to assess the implications of those suspicions, determining whether there is reasonable cause to believe as to whether that breach is significant or material, and then they should also be considering whether it constitutes criminal conduct. In cases where they do decide that there is reasonable grounds, they should be reporting to the regulator.

PL: So can you give us a bit more clarity on what the responsibility to report actually covers?

RW: If you’re sitting there conducting an audit, you don’t have perfect information necessarily; it’s difficult to come to a complete assessment as to whether or not a breach has been committed. So there is a requirement here for auditors to, you know, really apply professional judgment to determine whether or not it’s a matter that’s materially significant to the regulator.

PL: As you say, professional judgment is key here. You’ve worked in audit. In your experience, what sort of questions should auditors be asking themselves if they have any sort of suspicion at all about the possibility of fraud?

RW: These situations, they are never straightforward. Audit teams are, as a matter of course, under tight deadlines. They’re dealing with multiple stakeholders within the firm they’re auditing. Some of them are naturally difficult characters, as we’ve probably all observed, and you’re dealing with different information sources ranging from very simple to quite complex. So determining whether there’s grounds for suspicion is always a difficult task, especially if you’re thinking about whether or not you’re at the point where you want to raise that with the regulator. My recommendation in instances like this is to focus in on the audit evidence that you have available. And that’s a case of, you know, kind of asking yourself different questions about the situation.

So for me, it would be about thinking through, is there any missing or incomplete documentation? Has there been any significant discrepancies between the financial information you’ve received and any supporting evidence? Do the transactions appear to lack any legitimate business purpose? Different things like that – walk them through to build up the evidence for or against suspicions for fraud. Some of the important ones to think about are, has the client been defensive or obstructive in any responses? Is there any undue pressure to expedite the audit? And most importantly, I think I would recommend thinking through, would I be comfortable justifying the decision not to escalate if there was an investigation after the fact?

PL: Yes, perhaps the most important question of all. So at the most basic level, it’s about following process. It’s about documenting that process, even if the investigation doesn’t lead to a report.

RW: That’s right. I think it should be apparent to the audit file how you’ve reached your decision. I think there’s an important message here around if you are a member of the audit team – maybe you’re someone junior on site – raising your concerns with your audit manager. If you’re the audit manager and you think there’s something fishy going on, again, raising that with your engagement partner and bringing in those internal experts – legal, risk – to help you make the best possible decision given the facts and circumstances that are set before you.

PL: Because an apparent breach, it’s important, say, an apparent breach of statutory or regulatory requirements doesn’t automatically trigger a statutory duty to report to a regulator?

RW: That’s right. It’s very contextual – ie, if you’ve identified a minor breach, but that breach has already been disclosed to the regulator by the firm – it’s minor in nature; it appears isolated – you know, there might be grounds for saying, “Well, I don’t think we need to report this.” So it is very nuanced when it comes to making these decisions around whether or not to report.

PL: But as we touched on, there are penalties for not meeting these obligations, and they can be very substantial?

RW: And that’s because when fraud arises, damage is often done to customers, counterparties, creditors. You know, real financial damage can happen, and in particular in the regulated space. So yes, there is an obligation for auditors to act quickly. Do not delay if you’re at that point where you do suspect fraud, and the substantial fines that we’ve seen recently, they do act as a stark reminder and a lesson learned around the consequences if you don’t get this sort of thing right.

PL: Can you point us to resources with a bit more detail on this? We’ll put the links in the show notes.

RW: I would direct anyone to the professional standards e 240, ISA 250 (a) and ISA 250 (b). They are really quite comprehensive in setting out requirements in this space and, personally, I think they’re quite helpful in leading you down the right sort of possible decisions in respect of suspicions of fraud.

PL: That’s great. Thanks, Reuben, a sobering reminder, but a useful one.

That is it for this month. Check back later in the month for the September episode of Behind the Numbers. And I know I say this every time, but I’m going to keep doing it until word spreads right across the profession: listening to these podcasts counts towards your CPD. If you listen on the ICAEW website, rather than your phone, you can just click the Add CPD tool each time you listen, and that is that. So if you haven’t already done it, try it out with the next episode. Meantime, please rate, review and share this episode and subscribe to the whole series on whichever podcast app you like best. We’re keen for the podcast to reach as many accountants as possible, and every single rating helps that to happen. So thanks in advance.