Written by Joselyn Teuma – Masters of Advocacy Student
The buzzwords on everyone’s lips at the moment are without doubt ‘blockchain’, ‘Bitcoin’, ‘ICOs’ and ‘tokens’. While these innovative technologies are creating more efficient and easier ways of contracting and doing business, few people are aware of the multitude of legal consequence which these innovations might carry with them.
One central legal issue is the taxation implication on these technologies and how jurisdictions treat the notorious Bitcoin – and, by extension, other forms of digital currencies for VAT purposes.
In order to attempt to clarify the matter, the European Commission have presented several analysis and opinions on the taxation treatment of digital currencies as from early days of when Bitcoin was setting off, however, it was only in 2015, that, we were provided with some clear guidelines on the matter.
In October 2015, a landmark judgement was delivered by the Court of Justice of the European Union on the VAT implications in situations of exchange of fiat currency for bitcoins and vice-versa. In the case of Skatteverket v David Hedqvist, Mr. Hedqvist, a Swedish national demanded a preliminary ruling from the Swedish Revenue Law Commission to verify whether any VAT is due upon the purchase and sale of Bitcoin. The Swedish Commission ruled that bitcoin is to be treated as exempt from VAT, however, the Swedish Tax Authority appealed to the Supreme Administrative Court, claiming that Mr. Hedqvist’s intended transactions were not exempt under the VAT Directive.
The matter was referred to the CJEU, pronounced its decision after through analysis of the provisions of the VAT Directive, in particular Article 2 (which deals with transactions subject to VAT) and Article 135 (which deals with transactions which are exempt from VAT). The CJEU concluded that transactions involving an exchange of traditional currencies to units of bitcoin and vice versa are to be deemed as supply of services for consideration, but which are exempt from VAT. The CJEU in this case equated bitcoin (and by extension, other forms of virtual currencies) to currency, bank notes and coins used as legal tender so long as the exchange has no other purpose than to be a means of payment which is accepted for that purpose by the operators involved.
Under the VAT Directive, VAT is due upon a supply of service where such supply is made by a taxable person and for a consideration. Essentially, a direct link must exist between the service supplied and the consideration received. While in the above-mentioned case, such criteria were satisfied, and one can base the VAT treatment of bitcoin exchanges on the principles emanated from this CJEU decision, difficulties cropped up again regarding VAT implications upon the rise of Initial Coin Offerings (ICOs) and utility tokens.
To date there is no direct judgement by the CJEU similar to the Hedqivst Case on the treatment of ICO utility tokens however, the HMRC did deliver a judgement earlier this year, in January 2018, which could shed light on the treatment of tokens for VAT purposes. In Lunar Missions Ltd vs HMRC3, which dealt with the raising of money through a crowdfunding platform, the court analysed the distinction between single-purpose and multi-purpose vouchers from a VAT perspective. The Court held that in terms of the VAT Directive, if the place of supply to which the voucher relates and the VAT due are know at the time of issue, then the voucher would be classified as a single purpose voucher and VAT is therefore due at the time of issue of the tokens. If, however, at the moment of the ICO, the service to be provided is not clearly identified, and hence neither the corresponding VAT, the voucher would be classified as multi-purpose voucher and VAT is only payable once the voucher is redeemed.
It can be argued that the method of crowdfunding has similar traits to that of initial coin offering and that the utility tokens issued can be classified as vouchers under the VAT Directive. If so, in order to identify when and how tokens are subject to VAT, one may look at whether the utility tokens issued have the characteristics of a single purpose or multi-purpose voucher.
The technology today is developing and changing our lifestyles in unpredictable ways and at a rapid pace. The regulations and legislation that jurisdictions have in force might not addresses directly all the innovative technologies that are and will continue to arise, which leads to certain legal uncertainties and inconsistencies. Legislations in place should be in sync with the innovative world, and since it is impossible to amend them every single time that something new is established, it might be more practical to categorize these innovations by means of guidelines under the already existing norms and treat them in accordance to those respective classifications. The digital industry will continue to flourish, and it is essential for legal purposes that uniformity and certainty subsists.
Bibliography Skatteverket v David Hedqvist , CJEU (Fifth Chamber), Case C-264/14 COUNCIL DIRECTIVE 2006/112/EC [28 November 2006] on the common system of value added tax Lunar Missions v HMRC  UKFTT 7 (4 January 2018)