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There are presently no formal tax rules in the UK that govern how transactions involving crypto assets should be taxed. Instead, applying the preexisting tax rules to cryptocurrencies and associated transactions is required. HMRC’s Cryptoasset Manual details how tax rules apply. However, HMRC does not always consider itself obligated by its guidance manuals; therefore, caution must be taken if too much dependence is put on them without paying attention to tax laws.
Instead of Security and Utility Tokens, HMRC’s guidance focuses mainly on Exchange Tokens. While HMRC has promised to produce guidelines on Security and Utility Tokens, nothing has been released as of yet.
An employee who accepts crypto assets as “wage” may owe income tax and National Insurance Contributions (NIC) on the asset’s “notional payment” value. Employment income in crypto assets is subject to income tax and national insurance contributions (NIC) based on the asset’s value, as established by HMRC.
The next question to be answered is whether or not a crypto asset award should be subject to payroll/PAYE taxation rather than self-assessment after it has been determined that it is an award of earnings from employment.
Companies in the UK must withhold PAYE on cash and notional payments to employees. While the exact nature of crypto assets is debatable, it is generally agreed upon that they are not cash. Notional payments are subject to PAYE even when the employer makes no cash payment. Consequently, the employer is viewed as having made a payment (hypothetically). Among the many examples of notional payments are the delivery of cash vouchers, non-cash vouchers, credit tokens, and readily convertible assets (RCAs).
If trading mechanisms already exist or are reasonably expected to exist that allow tokens to be convertible into their monetary value, then the crypto asset in question will be an RCA. We would anticipate HMRC to consider the cryptocurrencies at issue RCAs if they were freely tradable on external marketplaces and could be bought and sold directly between users. If the crypto assets were deemed an RCA, the employer would be responsible for assigning a best-guess value and withholding the necessary amounts of PAYE income tax and Class 1 (employer and employee) NIC (and potentially, as of April 2023, Health and Social Care Levy deductions).