Press Room

30 May 2024

Andersen LLP responds to HMRC’s consultation on the UK’s implementation of the Cryptoasset Reporting Framework

HMRC has launched a consultation on the UK’s implementation of the Cryptoasset Reporting Framework, the amendment of the Common Reporting Standard, and the extension to domestic reporting.

General comments

We appreciate the candour with which HMRC engages with the industry and note that this consultation does not seek to reopen previous OECD consultations on the Cryptoasset Reporting Framework (CARF). However, we encourage HMRC to raise the following points during discussions with Working Party 10 (WP10) and the Global Forum.

Firstly, whilst participating jurisdictions can introduce additional obligations on top of CARF, in our view, consistency is key to ensuring a successful implementation and delivery for all parties. On that basis, we consider CARF must be treated as the standard for all adopting jurisdictions rather than the minimum standard. The consequence of over 50 jurisdictions modifying the reporting obligations, even if only slightly, will create significant confusion, particularly in the initial stages. This could be reviewed 24 months following the first exchange as this will then enable jurisdictions to make changes based on evidence rather than presumptions.

Secondly, implementing CARF will be challenging for all parties and we are pleased to note that HMRC does not appear to be seeking to add additional reporting obligations. This will aid implementation by reducing complexity for and burden on RCASPs where they are not grappling with differing obligations across the jurisdictions that have ratified CARF. As far as possible, we recommend that the OECD discourages tax administrations from making changes to the framework rules. The effects of the implementation should then be considered by the Global Forum in at least two years’ time to consider what, if any, improvements can be made.

Thirdly, for CARF to be effective, many jurisdictions must ratify it to prevent regulatory shopping, which could damage the UK’s competitiveness. Concerns about the public impact may also move customers away from reporting exchanges, mitigated by the broad adoption of CARF.

Finally, some jurisdictions have opted to adopt CARF, but not CRS, and there is a concern that confusion may arise for reporting entities that have a reporting requirement under both. Care will be needed to ensure that there is no inadvertent data breach by sharing information with HMRC for a jurisdiction that is out of the scope of CARF.

The following responses consider the points raised in the consultation. As cryptoasset specialists, we have focused primarily on the questions below that relate to CARF, not CRS.

Question 1: Do you consider the scope of, and definitions contained within, the OECD CARF rules to be sufficiently clear? Are there any areas where additional guidance would be helpful?

Understanding that CARF’s policy intent is to identify the actors that facilitate or effectuate transactions, the definitions of an RCASP and cryptoassets are broadly clear. However, further clarity would be welcomed for certain activities, for example, as we note below in question 2 in more detail, the interaction between effectuating transactions and the nexus rules may be problematic in some circumstances, and additional guidance would be helpful.

The labelling of transactions also requires clear guidance from the OECD and HMRC. For example, “staking” can have two meanings; as a consensus mechanism or as a lending transaction in Decentralised Finance (DeFi). In the first example, any receipts in the UK would be taxable, while amounts received from a loan are not taxable. Without clear guidance, tax administrations may mislabel or misinterpret these terms, which could lead to unnecessary enquiries from HMRC. We note that this cannot be tackled by HMRC alone and must be undertaken in conjunction with WP10.

Concerns remain over the scope of the definitions, particularly their application to NFTs. Additional guidance is required to remove doubt about how an RCASP can identify where they are used for payment or investment purposes or are part of a closed loop. The guidance should include examples (e.g. where the NFT acts as a ticket for concert access) of whether the NFT should be treated as a relevant cryptoasset, and under what circumstances.

The scope of a relevant cryptoasset in relation to stablecoins may also benefit from additional guidance to clearly delineate between a stablecoin that is a relevant cryptoasset and a Specified Electronic Money Product by using real-world examples.

Additional guidance on applying Real World Assets (RWA) for payment and investment purposes would be needed to help RCASPs determine whether they are in scope. For example, real estate tokenisation could be brought into the scope of CARF, which is not comparable with CRS. Tokenisation can extend to a wide range of assets with popular use cases for the underlying asset to be artwork or other intellectual property where reporting will significantly broaden the scope of CARF and any communicated policy intent.

Question 2: Are there any areas where additional guidance would be helpful on the nexus criteria?

The nexus rules broadly follow OECD-established principles in a clear and logical manner. However, their application to the cryptoasset sector could prove problematic in certain circumstances. Identifying the nexus will be particularly problematic where decentralisation is either present or an ultimate objective for a platform. For example, a decentralised exchange (DEX) may not meet conditions such as being tax resident or incorporated in a jurisdiction. This then requires nexus to be identified by where the entity is managed or if the entity (or individual) has a regular place of business. The management of a DEX may not follow conventional thinking as to what demonstrates control.

Decentralised Autonomous Organisations (DAO) are also problematic as their structure can use governance tokens that, to varying degrees, give parties rights to participate in the decision-making process. Like DEX’s, this makes identifying the nexus using management and control principles difficult.

We suggest that further guidance on what may constitute the nexus where a trading platform has been made available would be helpful in the context of DEXs. By way of explanation, a DEX does not operate in the same manner as the centralised exchanges and may use automated market markers (AMM) to effectuate transactions. AMMs are not a legal construct and are more like programs that enable the transactions to be effected. Under the FATF guidance for the 5th Money Laundering Directive, software cannot be a business therefore it is unclear if a similar stance will be taken by HMRC/OECD.

We recognise that these are niche examples in the context of global transactions. However, to provide certainty, we would welcome guidance from HMRC that provides examples of the activities and structures they consider to be within the UK’s jurisdictional scope and CARF’s scope.

Question 3: Are there any areas where additional guidance would be helpful on reportable information?

Setting up the reporting process will take time and effort; however, once complete, it will have a reduced impact on subsequent years. We recommend that HMRC ensure that the OECD publishes the required schema for reporting as soon as possible to enable RCASPs to start preparing and building the relevant infrastructure for reporting.

Where possible, we should seek to simplify reporting obligations with low tax risk and within the framework’s scope, thereby not necessitating a renegotiation of CARF. For example, NFT reporting could be simplified by using a notional peppercorn amount (e.g. $1) where no value is listed on the RCASP and/or enabling listing by collection rather than each token individually. For example, some of the top NFT collections can have thousands if not tens of thousands of NFTs and if each were to be reported separately it would increase the volume of information required to be reported.

Similarly, where a token representing an RWA is exchanged there may not be an open market value. In this event, further guidance on determining a suitable alternative would be useful. We suggest the valuation that could be applied is based on the acquisition cost, book cost or the value most recently reported to the counterparty of the cryptoasset.

Question 4: Do you agree with the government’s proposal to align the timeframe with CRS reporting requirements?

We see no particular concerns with the reporting timeframe aligning with CRS. However, we must note that this new and evolving sector may need additional time to cope with the tight implementation timelines, which HMRC must recognise.

Question 5: Are there any areas where additional guidance would be helpful on the due diligence rules?

Gathering Tax Identification Numbers (TIN) may be problematic for RCASPs. Existing Know Your Customer (KYC) regulations under the 5th Money Laundering Directive (MLD5) require identification based on some form of national government-issued document, such as a passport or driving licence. However, as far as we know, few RCASPs have gathered any tax information, particularly for individuals such as National Insurance numbers (NINO) or Self Assessment unique tax references (UTR). This will require significant effort from existing clients/users of RCASPs. In the UK, NINOs are not used as readily as social security numbers in the US. Obtaining the relevant information may pose a challenge for users – we recommend that HMRC work with RCASPs to help customers collect their information through HMRC helplines or access to Government Gateway accounts taking into consideration the lack of capacity that HMRC helplines have.

This will, in theory, reduce the incidences where an incorrect TIN is provided to an RCASP.

There will be incidences of individuals having neither a NINO nor an SA UTR, therefore, further guidance will be needed for RCASPs in those circumstances.

Question 6: Do you agree that, in principle, penalties relating to CARF obligations should be consistent with structure set out above?

The overall penalty categories under the Model Rules for Digital Platforms (MRDP) appear appropriate. This is based on the view that the penalties seek to ensure that returns are provided in a timely manner, that record keeping is maintained, and that the provided information is complete and accurate. These are reasonable obligations for an RCASP to be required to fulfill.

However, based on the experience of implementing similarly pervasive and extensive reporting requirements like CRS/DAC8, faults are very likely to be committed in the initial stages. As an immature sector RCASPs will not have the same experience to draw upon as financial institutions did with implementing CRS. This means that there will be a period in which RCASPs will need to fine-tune their processes and capabilities to ensure the required level of compliance.

Considering this and the significant challenges these requirements impose on the RCASPs’ operations processes and IT/data security infrastructure, we believe introducing a penalty abatement regime would be desirable and sensible for at least the first two years.

In addition, as HMRC does not objectively collect penalties revenues, it is important to be flexible with the RCASP. We consider flat-rate penalties for non-compliance inappropriate because RCASPs vary significantly in size, turnover, and profit.

We propose that non-compliance penalties should incorporate turnover and behaviour criteria.

The initial amount for the penalty should be proportionate to the turnover of the UK entities’ RCASPs. This reflects the RCASP’s ability to pay the penalty and reduces the undue moral hazard associated with a fixed penalty regime where larger RCASPs could dismiss and ignore the penalties as not financially significant.

The RCASP’s behaviour would then determine the mitigation, if any, of the penalties to reflect their approach to compliance. Mitigation should be based on the existing approach to penalties, where deliberate non-compliance results in a more severe penalty than, say, careless non-compliance.

However, if HMRC were not to take this sensible and pragmatic approach, we think there should be statutory limits on the amount of a penalty that can be levied in response to any particular issue that may arise. For example, an error that results in addresses being reported incorrectly may affect thousands of account holders. However, a penalty of £100,000+ for that error does not seem proportionate to the error involved.

Question 7: Do you think that the penalty amounts in the MRDP are appropriate for the CARF?

Please note the above response.

Question 8: What additional strong measures would be appropriate to ensure valid self-certifications are always collected for Crypto-Users and Controlling Persons?

We believe that firms want to comply and that the sanction is sufficient. However, there are issues regarding ensuring that an RCASP has received a valid self-certification. Proof of tax residence is not a settled matter in all cases.

How do RCAPs confirm that NINOs are accurate? Unlike other UTRs, such as VAT or corporation numbers, an RCASP cannot validate the information provided.

Without additional guidance for the RCASPs in this regard, they should not be penalised if a self-certificate turns out to be invalid.

Question 9: What additional one-off or regular costs do you expect to incur to comply with the requirements of the CARF? Please provide any information, such as costs, staff time or number of reportable persons/RCASPs affected which would help HMRC to quantify the impacts of this measure more precisely.

We are unable to provide a view on this aspect, however, we are aware that other parties will be responding that will be able to provide an accurate assessment.

Question 10: Do you agree with the government’s approach to Qualified Non-Profit Entities?

We do not have a view on this matter.

Question 11: Do you agree with the proposal to have an election to ignore the switch-off and report under both regimes?

We agree as this will allow the reporting entities to decide how best to meet the obligations under both regimes.

Question 12: Do you consider the scope of, and definitions contained within, the rules to be sufficiently clear? Are there any areas where additional guidance would be helpful?

We do not have a view on this matter.

Question 13: Do you agree with government’s proposal to introduce a mandatory registration requirement?

We do not have a view on this matter.

Question 14: Do you agree that, in principle, penalties relating to CRS obligations should be consistent with those set out above?

We do not have a view on this matter.

Question 15: Do you think that the penalty amounts in the Model Rules for Digital Platforms are appropriate for the CRS?

We do not have a view on this matter.

Question 16: What additional strong measures would be appropriate to ensure valid self-certifications are always collected where required?

We do not have a view on this matter.

Question 17: Do respondents have any comments on the assessment of impacts of these proposals?

There is a concern that customers of RCASPs may not know about the additional information that may be required, such as a TIN. It has been suggested that a message from HMRC would assist in educating taxpayers and reassure them that the information is required and not part of a “phishing” scam. If HMRC cannot provide such a communication, we recommend cooperating with a professional body(ies) to assist with this message.

Implementing CARF will be challenging for all RCASPs, but especially for smaller ones and start-ups, due to the complexity of the framework and the anticipated significant implementation costs. We consider that HMRC is generally pragmatic in its approach and that the department accepts that the initial stages of implementation will be particularly difficult. Again, we recommend abating any penalties during the first two years.

Question 18: What are your views on extending CARF by including the UK as a reportable jurisdiction? What impacts would this have on RCASPs in scope? Are there other issues, regulatory or legal, that will need further discussion?

To gather information from cryptoasset exchanges in the UK we understand that HMRC has used Paragraph 13 Schedule 23 FA11 which applies to “A person who (in whatever capacity) is in receipt of money or value of or belonging to another is a relevant data-holder.” This power would appear to be wholly deficient in meeting the stated objectives of CARF as it does not provide HMRC with sufficient information to undertake any risk assessment.

Therefore, we question whether the inability to use CARF for domestic purposes will require HMRC to introduce new legislation under Schedule 23 to gather the required information. We note that any new information power must be agreed upon and could be considered contrary to the outcome from the Tax Administration Framework Review (TAFR) which was conducted to ensure that the legislation and processes were sufficient for the next 10 years.

However, if agreed upon, the separate development of domestic legislation could result in differing reporting obligations for RCASPs. For example, while the US has signed its intent to be a participating CARF jurisdiction, the US has implemented separate domestic reporting requirements. These rules are substantially more stringent than the CARF agreement and have little read-across. This means that, from the US perspective, there will be two differing information reporting obligations on RCASPs/exchanges following the implementation of CARF.

We can support the extension of CARF in this manner provided it does not lead to domestic reporting that is different to non-domestic reporting requirements.

Question 19: What are your views on extending CRS by including the UK as a reportable jurisdiction? What impacts would this have on reporting entities in scope? Are there other issues, regulatory or legal, that will need further discussion?

We do not have a view on this matter.

Question 20: If the UK were to decide to introduce domestic CARF and CRS reporting, what are your views on implementing to the same timeline as the international CARF/CRS2 package (information collected in 2026, exchange in 2027)?

We see no rationale for the date to differ.

Photo by Stanislaw Zarychta on Unsplash.

Zoe Wyatt

Zoe is a Partner at Andersen Tax in the United Kingdom. Specialising in international tax, she develops the blue-print solution to her clients’ cross-border needs.

Email: Zoe Wyatt

Ben Lee

Ben is a Partner within Andersen’s crypto team and is a highly experienced and accomplished Chartered Accountant and Chartered Tax Advisor. With a strong focus on digital assets, Ben is committed to providing individuals and companies with expert accounting and taxation services in this rapidly evolving landscape.

Email: Ben Lee

Dion Seymour

Dion is a Director with extensive experience in all aspects of the taxation of crypto assets. He was formerly the crypto asset policy and product owner at HMRC.

Email: Dion Seymour

Helen Siqin

Helen Siqin is a Senior Manager at Andersen in the UK.

Email: Helen Siqin

Marek Krawczyk

Marek is a Partner and Head of US Business Tax at Andersen LLP, and works with European based corporate and individual clients with corporate or partnership investment on their US related issues.

Email: Marek Krawczyk

James Paull

James is Head of the Incentives group at Andersen LLP. He provides advice in respect of the deign, implementation and operation of employee incentive arrangements to companies, partnerships and individuals with a particular focus on tax, legal and technical aspects.

Email: James Paull