VAT treatment of NFT’s

When we first posted about the tax treatment of NFT's several years ago there was little or no published guidance from HMRC. Regrettably this still appears to be the case. As the NFT space continues to evolve and encompasses many new start-ups we've decided to focus on the potential VAT treatment of NFT's

VAT treatment of NFT's

Because NFTs have become less of a novelty and grown in popularity, it has been suggested that the they might be considered a digital service. If that's the case you would need to consider the rules regarding VAT on digital services - see below. 

As NFTs cannot constitute as tangible assets, the argument is that they should potentially be treated as services for VAT purposes. In fact, some EU countries, including Belgium and Spain, have determined  that they are digital services   Additionally, the EU VAT committee has also recently published a working paper on the VAT treatment of NFT's. In view of this, there is a strong possibility that HMRC will follow suit shortly.

VAT treatment of NFT's - place of supply

If NFT's are regarded as a service (albeit a digital one)  an appropriate starting point would be to consider the VAT rules for the place of supply of services .  

The general rule is as follows:

  • For supplies made to relevant business persons (B2B) the VAT place of supply is considered to be where the recipient belongs.
  • Where those supplies are for non-business customers (B2C), the place of supply is where the supplier belongs. 

Given their highly collectible nature (one client compared them to Pokemon cards!) it's reasonable to assume that the majority of transactions will be B2C. If that's the case, then this would suggest that where an NFT business is UK based there would potentially be an obligation to register for UK VAT. 

However there are some exceptions which override this general rule, digital services being one of them. 

In the case of digital services, if you are a business supplying digital services to private consumers then the place of supply is deemed to be where the consumer belongs.

However, one of the logistical problems is that whilst the public key of the NFT purchaser's wallet is visible on the blockchain, the purchaser's identity is not generally known to anyone other than the owner of the wallet themselves. As individuals operating in the crypto and NFT sector are notoriously private this would make it very difficult to determine the identity of the purchaser and their location.

In terms of any requirement for an NFT business to register for UK VAT, this will be determined by where the consumer belongs and then only to the extent that the consumer belongs in the UK. 

Because it is effectively impossible for an NFT business to establish the identity and location of their customers this would make it impossible to determine the value of digital services within the scope of UK VAT and thus whether registration for UK VAT is required.

Additionally, if the NFT's are sold by a UK business via a non-UK based website, you could reasonably take the view that your purchasers are based outside of the UK (and thus potentially outside the scope of UK VAT). 

If that was the case, then in the absence of any evidence that UK sales exceed the VAT registration threshold an NFT business would not be required to register for UK VAT.

However, you should bear in mind that, this may not preclude a requirement for EU VAT registration for a UK NFT business,  given the recent decisions in Belgium and Spain - see above. 

Therefore if you are particularly risk averse you may either wish to obtain a ruling from HMRC, or consider a voluntary UK VAT registration.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

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