Case Study: HMRC disclosures for complex crypto tax challenges

A construction material supplier who had invested in crypto assets both personally and through his company sought assistance from the Menzies Tax Disputes and Disclosures (TDD) team, having been referred to the specialist crypto team within Menzies. The client needed to update his tax obligations with HMRC but had struggled to find a firm with the necessary expertise in crypto taxation.

In addition to addressing his immediate tax issues, he was looking for long-term in-house support for both his personal and corporate accounts, particularly from a team experienced in handling crypto taxation. Georgia, a Senior Manager specialising in tax disputes and disclosures, along with Sean, a Senior Manager from Menzies’ Private Client team arranged an initial meeting to understand the client’s challenges.

It became clear that the client faced complex tax disclosure issues due to investing both personal and company funds for crypto trading into the same wallets. While he had maintained records through an online crypto portfolio tracker and tax software, the personal and corporate investments were intertwined, and the online software could not accurately reflect chargeable gains and income.

During the period of owning and investing in various crypto assets, the client had experienced substantial growth in the value of his crypto asset investments. The client’s trading activity was not straightforward, however. As well as simple purchases and disposals, the client was involved in exchanging tokens, as well as mining, staking, and investing in Initial Coin Offerings (ICOs). This meant that taxable transactions were taking place daily, regardless of whether any profits were realised in cash.

Due to the nature of some of the crypto investments, the client was not able to make withdrawals of the full value of his portfolio when the value was at its peak. The value of the portfolio fell over time, but a tax charge is crystallised when a crypto asset is disposed and the tax is based on the value at the date of disposal, not the current market value of any assets still held. This meant that the client faced a large tax bill on the value of assets he no longer owned, creating a financial strain and cashflow issue. Additionally, the risk of penalties for non-disclosure further added pressure to the situation.

The immediate priority was therefore to notify HMRC of his intent to make a full disclosure for both himself and the company, and for the Menzies TDD team to bring his tax affairs up to date by recomputing his personal and corporate tax liabilities, factoring in the historic crypto activity. This would ensure full compliance with HMRC, offering the client a clean slate before then being able to bring his company accounts fully up to date and address his ongoing tax obligations and accounting compliance.

Georgia communicated the plan to the client which would involve two disclosures – one for personal tax and another for corporate tax – to rectify past liabilities. After obtaining the client’s approval, she initiated the necessary HMRC registrations and conducted a thorough review of the online records available. This involved time and care to understand exactly what kinds of transactions the client was involved in, and with the help and expertise of Sean, both Georgia and Sean supported the client in bringing the online records up to date.

Due to the sheer volume of transactions that had taken place, it was going to be unfeasible to then reconstruct the client’s trading history with an accurate split. As a result, a pragmatic approach was required.

The TDD team are accustomed to making estimates and assumptions and as long as these are reasonable approaches and explained to HMRC sufficiently, the disclosures are usually accepted by HMRC without question and this case was no different. By developing a methodology that met HMRC’s approval.compliance was managed effectively whilst minimising costs for the client.

The TDD team’s established working relationship with HMRC proved invaluable, as the assigned case officer had confidence in the two disclosures that were then submitted. As a result, Georgia successfully secured a zero-penalty outcome, mitigating additional financial burdens for the client. However, the outstanding tax liabilities remained a significant challenge. Recognising this, Georgia negotiated an extended payment plan, securing an unusually long three-year term to ease the financial pressure.

With past tax disclosures successfully resolved, Georgia provided a full handover to colleagues in the Menzies’ Accounts, R&D, outsourcing, and private client teams, ensuring the client received ongoing support for both his personal and his company’s affairs, with a continued focus on crypto expertise.

Georgia offers two key pieces of advice for crypto investors: “Taxable transactions can occur even without cash profits, meaning you may be unknowingly triggering tax obligations. And when it comes to tax, record-keeping is crucial – tax software alone isn’t enough, as it still requires human input and a clear understanding of your crypto activities. When in doubt, seek professional advice.”