Interview with Paul Twydell, Director and Jon Dawson, Senior Manager at haysmacintyre
Tell us about your background.
PT: I am a chartered accountant, chartered tax adviser and a director in the Creative, Media and Technology team at haysmacintyre.
JD: Like Paul, I am a chartered accountant and senior manager, also working in the Creative, Media and Technology team. I advise clients on a variety of services, ranging from audit and accounting to special advisory and corporate finance. I also take a real interest in the fintech space and I work with a number of fintech clients.
As an accountant, how has the rise in cryptocurrency adoption affected your work?
JD: The emerging market of cryptocurrencies has been of interest to a range of our clients, including those in the financial services sector. Some clients have started to show an interest in cryptocurrencies for investment purposes, some use cryptocurrencies to invoice customers and pay staff, whilst others in the fintech space are developing products on the blockchain. Despite their different interests, most clients are concerned about the tax issues relating to cryptocurrencies, particularly due to the fluctuations in their value.
PT: The biggest challenge when advising on cryptocurrencies is that HMRC has not updated its guidelines on cryptocurrencies since 2014. Given how far the market has come over the past few years, we would expect clarification sooner rather than later.
How easy have you found it adopting these new technologies as part of your role?
JD: Cryptocurrencies have certainly brought new challenges for the audit sector. The audit process has remained relatively unchanged for many years, and auditors have found ways to prove the existence and valuation of common assets. It is harder to prove that cryptocurrencies exist and what their value is, as they are a completely new type of asset and there is much debate within the audit sector as to which category of asset cryptocurrencies fit into. This makes it more difficult to confirm what a client’s assets are, and how much they are worth. When advising clients who work with these technologies on a daily basis, the process can get very technical and it is important that we understand and keep up-to-date with the technologies involved.
PT: From a tax perspective, the technology has been quite easy to adopt, especially with clients who claim research and development (R&D) tax credits – typically, these clients work on the blockchain. When making an R&D claim, businesses have to clearly explain the complex technologies used in their products to us and HMRC, which means we gain a good understanding of the technology from the outset.
When did you first realise that cryptocurrencies are a serious business and are here to stay?
JD: I have been interested in blockchain technology for a while but three years ago, a small number of our clients began using cryptocurrencies when the market was still relatively unknown. Over the last twelve months it has become much more widely accepted that these technologies are here to stay.
PT: It is worth keeping in mind that the market hasn’t yet determined whether cryptocurrencies can satisfy the definition of being currencies in the long-term. However, a lot of growth in the use of cryptocurrencies’ underlying distributed ledger technologies (DLTs) will be seen: these eliminate the need for a third party when distributing records of anything of value, and will have a number of uses that could be of great value to many businesses.
JD: The accountancy industry could end up viewing DLTs, which hold information relating to all historic transactions, as a secure way for the whole accounting system to work, which would change the face of some services, such as audit.
What do you think of the current state of regulation in the crypto sector and where it’s heading?
PT: The FCA are responsible for regulating everything that relates to securities and financial instruments, with the objective of protecting consumers, as well as the market. However, cryptocurrencies don’t meet the definition of a security or of a financial instrument, so the FCA don’t currently have a responsibility to regulate the sector. There is increasing pressure on the FCA to re-evaluate its stance on cryptocurrencies.
JD: HMRC has remained quiet on this issue. If, for example, the value of Bitcoin is rising, there is no clarity on whether those increases in value should be taxed in the same way as other assets. However, recently, when the value plummeted, ’non-day traders’ might have argued that they could set off any resulting losses against other income or gains. So, with tax revenues at risk and this could be a potential trigger for HMRC to clarify the tax treatment.
PT: The Government’s default position on day trading in cryptocurrencies is that, unless it is set up properly as a trade, any investments that are made do not qualify as trading income, so there is less flexibility for maximising losses. As a result, HMRC may view most losses as capital losses, and unless a person has significant assets from which capital gains can be derived, they aren’t going to have any opportunity to use those losses against their other income.
A lot of people compare blockchain and Bitcoin to the start of the internet age in the early 90s. But we recently heard Maya Middlemiss from BlockSparks compare it to the Gold Rush in California in the late 1800s. What do you think of this comparison? Is it a fair one?
PT: It is difficult to compare the uptake in cryptocurrencies to the Gold Rush in California, because the value of gold was clearly defined at the time. Investors are able to see the potential of cryptocurrencies, similar to the way in which the markets could see the potential of the internet. After the ‘dot com’ boom, we saw a contraction in the market; we could witness the same scenario with cryptocurrency and blockchain.
Which industries do you think stand to benefit the most from blockchain technology?
PT: In order for cryptocurrencies to succeed, a large number of consumers and suppliers need to be willing to circulate the cryptocurrencies. For example, some social networks have organised currencies where people can sell certain products in exchange for advertising or shares. Where those networks are controlled by one overarching company, they will all utilise the same currency: helping boost the currency to become a success.
JD: I think two sectors stand to benefit among the most from blockchain technology: not-for-profit and fraud prevention. In the not-for-profit industry, some donors have the notion that if you donate £1 to a charity, only a fraction of that amount will reach the intended recipient. By using blockchain technology, there is no reason why a donor couldn’t transfer a value directly to the cause, without a third party controlling the process in the middle, and you could trace the transaction. Equally, there is also huge potential for fraud prevention. Cash is one of the easiest assets to launder, and whilst the introduction of credit and debit cards have made it more difficult, it has not eradicated the problem. Blockchain should make it even more difficult to commit fraud.
What can the Government do to help further developments in blockchain technology?
PT: The Government already has a generous scheme in place concerning tax credits. However, the Government needs to clarify how companies undertaking initial coin offerings (ICOs) should be taxed if that ICO will be used to fund future developments. As things stand, if a company invented a cryptocurrency, that cryptocurrency could be treated as income in the company’s accounts at the time. That income could then be utilised for future development costs, but it is still not clear how this should be taxed.
JD: As with the development of the internet, if the government acknowledges cryptocurrency and blockchain, it might help different generations take an interest in the sector and consider it over more traditional career paths.