Taxation of Decentralised Finance Consultation: Simmons response

Simmons & Simmons has submitted a response to HMRC's consultation on the tax treatment of decentralised finance (DeFi). In summary, the government is consulting on proposals to introduce legislation to disregard from CGT the transactions that would otherwise occur when cryptoassets are lent or staked. For details of the original consultation, see our earlier article.

Our response makes it clear that we are generally supportive of the proposed rules HMRC have provided. This is provided that the 4 element test set out in the consultation has sufficient 'future proofing' as the industry develops. This will ensure that DeFi transactions do not inadvertently fall outside the scope of the policy approach / rules . We also noted that careful consideration will need to be given to definitions (including 'same types of token' and 'borrower') to reduce scope for abuse of the rules.

HMRC's proposed approach to treat DeFi returns as revenue in nature and charged to a new miscellaneous income charge specific to cryptoasset transactions has broad appeal. However, we have noted that there are considerations associated with this approach to ensure that the position aligns with broader policy. In summary:

• there may be certain existing transactions entered into where the intention and expectation, based on (and in some cases in reliance on) current HMRC guidance, is that DeFi returns will be taxed as chargeable gains and not as income;
• the potential conflict with the recent extension to the UK investment manager exemption (IME) which was extended to cover transactions in "designated cryptoassets". Any proposed change to treat returns as 'miscellaneous income' should ensure that amounts arising to non-resident UK funds are not incidentally charged to UK tax (in contrary to the settled position); and
• The approach should not result in any obligation on a relevant person by or through whom such return was paid to deduct or account for amounts representing basic rate income tax (as was identified by HMRC in the context of peer to peer lending.