In this digital age, some companies are deciding to pay their employees salary using cryptocurrency (crypto assets). For employers, this means understanding the compliance reporting requirements. For non-domiciled individuals working in the UK, receiving salary in cryptocurrency may restrict UK tax relief on their foreign income.
Below we have summarised some of the main points to consider when paying employees in cryptocurrencies. However, there are now more than 12,000 cryptocurrencies, which are structured differently and can result in different tax treatment depending on their underlying nature. Given the possible differences in treatment and differing view on the treatment of some crypto assets for some individuals, it is important any business thinking of paying their employees in crypto assets takes specialist advice beforehand.
UK payroll reporting requirements
Like ‘normal’ cash salary payments, payments to employees in the form of ‘readily convertible assets’ are also subject to Pay-As-You-Earn (PAYE) withholding. A ‘readily convertible asset’ is an asset which is tradeable on a recognised Stock or Commodities Exchange. It also includes any asset for which trading arrangements exist, ie the employee is able to sell the asset that has been awarded to them. Since the vast majority of crypto-currencies can be easily exchanged for cash or other assets, they are most likely deemed as readily convertible assets.
Under PAYE, the employer needs to report the cash equivalent of the income on their UK payroll, and deduct PAYE income tax and Class 1 employer and employee National Insurance Contributions (NICs).
The employer usually must send details to HMRC every time they pay an employee, on or before the time of the payment. The information is submitted electronically using a Full Payment Submission (FPS) which is generated by the employer’s payroll software or payroll provider.
If it is difficult to submit an FPS on or before the day on which an employee is paid in cryptocurrencies, details must be submitted as soon possible after the payment is made, and no later than the 19th of the following tax month. Payroll taxes are payable to HMRC by the same date (or the 22nd if the payment to HMRC is made electronically).
Because the income is not paid in cash, but PAYE and NIC payments must be paid to HMRC, the employer has two options:
Pay employees the crypto equivalent of the net amount after PAYE and employee NI deduction, or
Pay PAYE to HMRC on behalf of the employee. If the employee fails to reimburse the employer for the tax deducted within 90 days of the end of the tax year, any amounts not recovered are treated as a taxable benefit and must be reported on Form P11D.
If the crypto-currency is not considered a readily convertible asset the employer does not have to apply PAYE income tax or national insurance deductions. Instead the employee would have to declare any amount received on the employment pages of their self-assessment tax return and pay any liability through self-assessment.
For the employee receiving salary as cryptocurrency is important to note that HMRC do not consider cryptoassets/cryptocurrencies to be currency or money. This means all transaction in a cryptocurrency by the employee will be a disposal for capital gains tax. This mean capital gains tax could potentially arise on transactions between different cryptocurrencies or if the employee used them to pay for goods and services.
Crypto currency – deemed remittance
Non-domiciled UK resident individuals can claim the remittance basis on their UK tax return meaning that foreign sourced income and gains are not taxable in the UK unless remitted to the UK.
For employment earnings, relief is available on income attributable to duties performed outside of the UK in the first three tax years after the employee became a UK resident, insofar as the earnings are not remitted to the UK. This is known as the Overseas Workday Relief (OWR).
Earnings are “remitted” if the property is received or enjoyed in the UK. The property is treated as received in the UK if property is received and such property is UK situated. HMRC’s view is that personally held cryptocurrency (which are exchange tokens) are UK situated if the beneficial owner is a UK resident.
If the crypto asset represents an underlying asset (such as with Stablecoins/Utility tokens), then the location of the underlying asset will determine the location of the crypto asset.
So, based on HMRC’s guidance, both employment earnings and personal income and gains received in the form of cryptocurrency could be deemed remitted to the UK for UK resident individuals. The associated income and gains will be subject to UK tax, even if the cryptocurrency is kept in a foreign exchange. As a result, the potential tax savings under the remittance basis do not apply to crypto assets.
It is also important to note that HMRC’s interpretation on situs on crypto asset has been disputed and other method for determining situs have been put forward. When considering the treatment of crypto assets for non-domiciled individual it is important specialist advice is taken as the nature of the crypto asset can affect the treatment and UK reporting.
For individuals eligible for the OWR or with other foreign income and gains, depending on the tax rate of the foreign country, the UK tax liability may be significantly higher if they are paid in cryptocurrency, compared to fiat currency.
Please contact Brenda Huin our Global Mobility team, if you have any queries in relation to this article.