15 November 2022
Despite being an extremely high-risk and volatile market as shown by the recent FTX exchange bankruptcy, many businesses, particularly those with popular or strong brands, are continuing to develop and sell non-fungible tokens (NFTs).
For those unfamiliar with the concept, NFTs are essentially digital tokens with an underlying digital asset which can be acquired. For example, businesses are selling NFTs which provide the owner with access or rights over digital artwork, or NFTs which allow gamers to use the brands within a gaming environment. NFTs can also be traded and many will see these as an investment with the hope the digital asset will appreciate in value. In short, the nature of NFTs is very diverse, and many large corporates are entering the market which has grown significantly over the past few years.
There is currently no specific information published by HMRC on the VAT implications of NFTs. However, given the limited case law and guidance available, it is likely that many will be considered an ‘electronically supplied service’ for VAT purposes. Where an electronically supplied service is supplied to a private consumer (rather than a business customer), many jurisdictions around the world, including the UK and EU member states, will tax the supply in the country where the customer belongs. This means that businesses could have an overseas VAT registration liability when selling NFTs, although there may be additional rules applying to sales via online platforms.
From a practical perspective, businesses will need to have systems in place to be able to track the location and business status of customers acquiring NFTs to determine the VAT implications of the sale. This may not always be clear.
NFTs will usually be sold via online platforms. It should be noted that the online platform provider may often be liable for any VAT due on the sale of NFTs via the platform (although this will not always be the case if certain conditions are met). The requirement for the online platform provider to account for VAT relating to digital products is currently being tested in the case of Fenix International Ltd case (C-695/20). The Advocate General’s opinion has supported the position that online platforms can be liable for the VAT due, and a final judgment is due towards the end of the year.
The VAT position relating to NFTs is evolving and can be complex. If not properly considered, it can also lead to unexpected VAT liabilities. Businesses already involved in the space should consider the potential VAT obligations, particularly if these arose at a time when values were much higher and how they might deal with this given the recent crash. While we await further guidance from HMRC on this rapidly expanding market, businesses should carefully consider their tax position when entering the NFT market.