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Dear friend,
I had promised in our first CTN that in each new edition a member of the team would write the sentiment and tell their story. Well, in this second (late) edition, Dion Seymour does indeed share his path into crypto and, like many of us, it was a case of ‘right place, right time’ and less strategic.
We started work on this CTN 2 at the time of the FTX collapse and we debated what and how much we should say on the matter. This in turn uncovered our differing views on what the CTN focus should be.
We are first and foremost tax specialists and our international expertise means we see pretty much every type of personal or corporate structuring issue across DAOs, DeFi, NFTs, metaverse and so on. There are enough people in this sector, with as much insight and experience, already giving their opinions. I strongly believe that the CTN must be dedicated to sharing our knowledge and opinions on the wonderfully complex tax issues that we come across.
Nonetheless, it would be a shame for Dion or other team members’ opinions to be relegated to Reddit. As such, in the New Year, Dion will launch a column on our website; “Degen Dion Discusses”.
We have therefore decided not to provide our chapter and verse on FTX and will say only this:
- Government & FCA: Whilst the government is making the right noises as regards making the UK a crypto hub (i.e. a place where firms can innovate whilst maintaining financial stability and regulatory standards), it does not absolve the FCA of failing the 80,000 Britains that lost assets with FTX, by not appropriately regulating this sector.
- Twitter: There are key personas in the crypto Twittersphere that understood the models of other failed exchanges, yet advocated SBF and FTX as their saviour. They did not stop to ask why the FTX model was any different; there was a distinct lack of critical thinking. We would like to hear what they have learnt and what they would do differently.
- Community Support: We know that, of the UK consumers affected, many are left with significant gains in 2021/22 and worthless or no assets facing the threat of losing their savings and homes. Laura and I have been working on what we’re terming a ‘Community Support’ project to provide guidance as regards no gains / no loss filing positions and debt management approach with HMRC.
- Market: Whilst November was a ghost town on the new business front, in the past three weeks we have seen Web3 project referrals at levels of Q1 2023 (i.e. inundated). We have had six new enquiries from UK and European founders seeking to interpose a US entity for fundraising purposes (this comes with significant tax leakage, which we discuss later) and wonder if / why the US market is remaining bullish on crypto as compared to Europe?
In addition, in this CTN we consider why, with current depressed cryptoasset values, the timing is perfect for individuals to contribute to a Qualifying Non-UK Pension Scheme (QNUPS) wrapping their crypto investments and deferring tax. We also shine a spotlight on Case Study 2.
I hope you find this edition of the CTN interesting and, as always, welcome your feedback.
Wishing you all a happy holiday.
Zoe
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Contents
1. Community Support
2. How can they find me?
3. US TopCo
4. QNUPS
5. Spotlight on: Case Study 2
6. Dion’s story |
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Community Support
We know that, of the UK consumers affected by the collapse of FTX and other platforms, many are facing depleted savings and the threat of losing their homes as they have significant (deemed realised) gains in 2021/22 (due to be filed and paid by 31 January 2023) and either an asset of no value or no asset at all.
Laura and Zoe have been working on what we’re terming a ‘Community Support’ project. We have drafted an article setting out the basic tax principles and circumstances in which a consumer may:
- form a filing position that no gain arose in 2021/22;
- make a negligible value claim for certain assets tied up in FTX or other platforms in insolvency;
- negotiate payment plans with HMRC; and/or
- debt write off requests with HMRC.
You can read the tax analysis and find downloadable templates for writing to HMRC here.
Zoe Wyatt
Partner and Head of Crypto & Digital Assets
M: +44 (0)7909 786 144 or
E: zoe.wyatt@uk.Andersen.com
Laura Knight
International & Crypto Tax Director
M: +44 (0)7843 264 281 or
E: laura.knight@uk.Andersen.com
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How will they find me?
Crypto is secret – right? No, it is not.
Cryptoassets are thought of as being anonymous, but they are actually pseudonymous. This means that there are methods of attributing an identification used with cryptoassets, albeit not using real world identities.
It is arguable that Bitcoin’s creator, Satoshi Nakamoto[1], never intended for it to be secretive. In the Bitcoin whitepaper[2] Satoshi stated that Bitcoin would be different to the traditional banking model with more transparency as “the public can see that someone is sending an amount to someone else”.
Is it as easy finding the person who owns crypto?
No, it is not – it is challenging but not impossible. Although the transparency built into the system did not extend to including real world identities, when fiat is put into or taken from the system there must be a point of exchange. Many of the cryptoasset exchanges that do this keep records that include real world identities.
Does the government track the blockchain?
No, it does not. Not all blockchain information is relevant, however, there are a number of blockchain forensic tools available to governments (and the general public) that can assist when more information is needed. These tools can provide, in real time, information on the movement of funds on the blockchain and, once they identify a cryptoasset exchange that records your identity, you will be found.
Do tax administrations get this information?
Yes, they can do and so much more. Many tax administrations have access to blockchain forensic tools and HMRC put out a tender in early 2020 for one[3]. Simon York (Director of HMRC’s Fraud Investigation Service) recently spoke at a Chainalysis Links event and said that criminals should be “worried” by HMRC’s capabilities[4].
But I don’t use crypto exchanges in the UK so they can’t find out who I am!
That doesn’t matter; at the Links event Simon York also highlighted HMRC is actively cooperating with other tax administrations as part of the “J5”. The J5 includes the IRS who have been very active in tracking and seizing cryptoassets. International treaties are, perhaps, the most important and effective tool HMRC has. These mean that HMRC can be provided with information from other tax administrations and can even request them to gather information on behalf of HMRC. This will become even easier in the future with the OECD’s Cryptoasset Reporting Framework (CARF) (you can read about CARF here).
Remember that, by design, crypto is not secret.
[1] Satoshi Nakamoto is the pseudonym of the creator of Bitcoin.
[2] Bitcoin: A Peer-to-Peer Electronic Cash System
 Dion Seymour
Crypto and Digital Assets Technical Director
M: +44 (0)7375 804 498 or
E: dion.seymour@uk.Andersen.com
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US TopCo
We have received six enquiries in the last ten days from European based Web3 founders looking to interpose a US company (US TopCo) above their existing development company (DevCo). US investors will generally prefer a US C-Corp or LLC (depending on the nature of the underlying business and their own corporate structure).
In each case, there has been a preference for a US C-Corp.
A US C-Corp is a corporation and opaque for tax purposes – much like the UK limited company, the German GmbH or the Dutch BV. It is not a hybrid entity as there is no difference in classification for tax purposes. Whilst this means we can ignore anti-hybrid rules in the DevCo country, the C-Corp as a holding company is still nonetheless an enormously tax inefficient structure.
We will discuss the tax inefficiencies of the LLC in our next newsletter.
Example
Facts:
- DevCo shareholders are all UK tax resident
- The shareholders incorporate a US C-Corp
- The shareholders transfer their DevCo shares to the C-Corp in exchange for the C-Corp issuing additional shares to them (also known as a ‘share-for-share exchange’). They adopt this approach so that any gain in their DevCo shares is rolled over into the base cost of their new C-Corp shares (mitigating UK capital gains tax and stamp duty on the share transfer)
- They raise investment from US and Asia
- The revised capital structure in the US C-Corp is:
- 75% UK resident individuals
- 10% Singapore corporation
- 15% US corporation
- The day-to-day operations of the business are undertaken predominantly in the UK with some contractors and employees spread globally
- Either DevCo or the C-Corp receive income from operation of the project
Tax outcome:
- Since the people functions are predominantly in the UK, most of the profit will be allocated to DevCo under UK and US transfer pricing rules, regardless of whether the income is earned by C-Corp or DevCo
- UK corporation tax is due on those profits at 25% from 1 April 2023 (currently 19%)
- When DevCo pays a dividend to the C-Corp there is no UK withholding tax
- The dividend is then subject to US CT at 21% on receipt by the C-Corp
- When the C-Corp pays a dividend to investors it is subject to US withholding tax at 30% on dividends to the UK and Singapore investors
- This may be reduced under the double tax treaty between the US and the UK. There is no treaty between the US and Singapore
- The rate can be reduced to 5% under the UK/US treaty, but it is unlikely that the Limitation on Benefits (LoB) clause will be met. This is because to secure the reduced rate of withholding tax, the shareholders in the C-Corp must be made up of seven or fewer US, UK or equivalent persons that account for 95% of the voting power in the C-Corp. An equivalent person is a person in an EU or EEA state that has concluded a treaty with the US on the same terms
- The effective tax rate on profits is therefore:
- US: 40.75%
- UK and Singapore: 58.52%
- By comparison, if there were no US TopCo and only the DevCo, the effective tax rate would be 25% (i.e. the UK CT rate) since there is no withholding tax on dividends under UK domestic law
Is there a solution?
Alternative 1:
In this alternative scenario:
- The DevCo sets up US C-Corp as a subsidiary
- All new investors come into the US C-Corp
- US C-Corp operates the business and pays US CT at 21%
- US C-Corp pays fees to UK Ltd to reflect the functions it performs – there should be no withholding tax on these payments. There is UK CT at 25% on DevCo’s profits
- US C-Corp pays dividends to its shareholders, subject to 30% withholding tax. Again, no treaty benefits available for UK and Singapore shareholders
- Effective tax rates on profit distribution:
- US: 21%
- UK and Singapore: 44.7%
Alternative 2:
Under this alternative, we would look to create a contractual JV between the DevCo and the US C-Corp such that profits were split between the two entities to mirror the returns that the US shareholders would have received if they were shareholders in UK Ltd.
The UK and Singapore shareholders could hold voting shares in the US C-Corp and the US shareholders voting shares in DevCo.
The effective tax rate on distributed profits would be:
- US: 21%
- UK and Singapore: 25%
Zoe Wyatt
Partner and Head of Crypto & Digital Assets
M: +44 (0)7909 786 144 or
E: zoe.wyatt@uk.Andersen.com
Helen Siqin 
Senior Manager
M: +44 (0)7496 410 120 or
E: helen.siqin@uk.Andersen.com
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Qualifying Non-UK Pension Scheme (QNUPS) – a wrapper for your crypto transactions?
A QNUPS is a pension scheme established outside the UK that can provide tax deferral on your crypto transactions.
It is particularly attractive for those that have paid the maximum into their UK pensions. An individual can make a contribution (there is no minimum or maximum) and the QNUPS can make investments in cryptoassets.
A QNUPS allows you to draw down a 30% lump sum at 55 and then receive a regular income (which is not an annuity) over a period using an actuarial calculation. You would pay UK tax at marginal rates (if you’re UK resident). It is also IHT friendly as anything left in the QNUPS should be outside your estate.
The QNUPS may also have a service agreement with a UK company that you own, through which you would provide crypto investment advice. It may also be possible to receive loans at a commercial rate of interest if you need to access the funds before 55.
There are only a handful of jurisdictions that have the concept of a QNUPS including, the Channel Islands, the IoM and Gibraltar and the only drawback with this structure is finding a corporate service provider with relevant crypto expertise willing to run the QNUPS.
With cryptoassets still at a significantly depressed value and many individuals with unrealised losses, now would be an ideal time to make contributions into a QNUPS. As ever, it is imperative that tax advice is taken as QNUPS aren’t suitable for everyone and the risks of getting it wrong are significant.
Zoe Wyatt
Partner and Head of Crypto & Digital Assets
M: +44 (0)7909 786 144 or
E: zoe.wyatt@uk.Andersen.com
 Miles Dean
Head of International Tax
M: +44 (0)7785 770 431 or
E: miles.dean@uk.Andersen.com
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Spotlight on: Case Study 2
Case Study 2 looks at the most common legal and operational structure for Web3 projects that do not have plans to become fully decentralised. You can read the case study in full here. |
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Dion’s story
I am Dion Seymour and I joined Andersen’s Crypto & Digital Assets team almost three months ago, following nearly 18 years in HMRC. Note that I never call it “the Revenue” as I started in Customs and Excise as a dreaded “VATman”. I performed many different roles and enjoyed the public service aspect of HMRC, and I was always happy to tell people where I worked as I believe in the role the Department performs. In late 2017, I joined the Financial Products and Services (FPS) team and, in early 2018, I was given the responsibility for being the lead for crypto.
Why me? Well as with most things in HMRC it comes down to availability. Having only recently joined the FPS team, I did not have a full caseload, which initially resulted in me taking on the team’s Brexit coordinator role (and because I was the only person in one Friday afternoon when they were looking for someone to take on the responsibility). And, a month later, I was again in on a Friday afternoon and given the Crypto lead (the incumbent had decided to leave the team to do a dedicated Brexit role and there was a key meeting the following week).
I did have some understanding of Bitcoin beforehand and been loosely involved in discussions, which made me a ‘natural’ fit for the role. I have often been asked my career path to land in crypto and it was much more ‘luck’ than judgement! Such is the HMRC way (but you do make your own luck).
There I am in a new role in policy (and new to crypto, but aren’t we all) with the 2017 peak still dominating the headlines (the HMRC Press Office stated crypto was their number three topic after Trump and Brexit). The questions I was handling from, well everywhere, showed there was a strong demand for a better understanding about how taxation of crypto worked and for the next four years I set about developing that understanding. It was challenging to say the least and was only meant to take up half my time, but by the end I was the only person working full time on crypto (there were lots of others where it was part of their role).
Over those four years I did more than I imagined I ever would in HMRC. From leading with the engagement of professionals and industry, development of HMRC understanding, development of international groups, answering requests from Press Office for lines to take, being responsible for the publication of the most detailed crypto guidance released by any tax administration and so much more.
A recurring theme over the years that needed careful handling was around criminality. Some in the department wanted to take stronger lines against crypto and I resisted. Not because I am crypto ‘friendly’, but because we needed to look at the facts. Just before crypto I had finished a period in the Offshore Coordination Unit dealing with offshore assets. I dealt with cases that ranged from deliberate to poor understanding. However, it was not that they had an offshore asset that made them behave in that way. It was the person.
With crypto I saw this the same way. Crypto itself is not the issue – it is how it is used that is the challenge. Crypto seems to be an emotive topic, and we all have biases viewpoints. However, often you need to take a step back and look at the bigger picture to understand what is happening.
You can find the wider team bios here.
Dion Seymour
Crypto and Digital Assets Technical Director
M: +44 (0)7375 804 498 or
E: dion.seymour@uk.Andersen.com
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