08 August 2023
HMRC recently published its latest ‘tax under consideration’ figures for wealthy individuals and mid-sized businesses. These are an estimate of how much additional tax could be raised in cases under review by HMRC for this group of taxpayers, prior to a full investigation of the specific facts and relevant legislation.
These figures can provide a rough snapshot of the areas HMRC has been looking at to potentially generate extra revenues and plug the so-called tax gap. Generally, the estimated tax underpaid in the various areas of investigation of wealthy individuals and mid-sized businesses has increased from the year to 31 March 2022 to the year to 31 March 2023. For example, the estimated potential additional tax revenue for cases relating to land and property has increased from around £105m in the year to 31 March 2022 to around £150m in the year to 31 March 2023.
There is one notable exception to this, which is in relation to the estimated figures relating to crypto assets. In the figures for the year to 31 March 2022, the estimated potential additional tax liability under consideration in respect of crypto assets was £2,277,465, but for the year to 31 March 2023, it is merely £234,046. It might be assumed that crypto is now regarded by HMRC as a very low risk area, or otherwise not warranting significant levels of investigation, but is this logical?
In November 2021, the price of one Bitcoin reached a record high of $68,789. This may well have generated a cashing out of profits at considerable gains, producing potentially material tax liabilities. It is logical that the 2021/22 tax year might be a high-water mark for the level of potential tax revenues from crypto asset transactions. Self-assessment tax returns for the 2021/22 tax year were due for submission on 31 January 2023 and so could be subject to early investigations.
Given the volatility of cryptocurrencies, even in a year where overall movement was minimal, an asset may have generated a large gain following a surge in value. Memecoins, for example, are extremely volatile and tend to have periods of fierce rises, where substantial profits may be made, before the markets ease.
The Financial Conduct Authority believes there are 4.97 million UK crypto investors, based on research carried out in August 2022. Anecdotally, many of these, especially at the lower end of the market, are unaware of their tax responsibilities.
In 2022 in the US, 97% of respondents to a survey which presented situations in which crypto could be taxed got at least one question wrong. In the UK, where most taxpayers are used to taxation being handled by HMRC with minimal input by them, it is quite possible that such a lack of tax knowledge is even more widespread.
In 2024-25 self-assessment tax returns, there will be extra boxes in which to report crypto transactions separately. That is presumably intended to help make it easier for HMRC inspectors to identify and investigate those with crypto transactions. So, whilst there has been a sudden decline in the estimated tax revenues in this area, perhaps this is the calm before the storm as HMRC gets its house in order.
Crypto assets are most likely here to stay. They are volatile and rapidly changing values can generate large gains (and losses). They are often popular with people with little understanding of tax, and the tax regime relevant to them is complex and ill understood. HMRC will surely keep a close eye on this potential source of revenue, but figures like those published this year by HMRC may lure taxpayers into a false sense of security that it is no longer focusing on crypto.