UK Tax for Bitcoin merchants

[Isosceles]

A friend of mine runs a small software business in the UK & regularly uses PayPal to take customer payments. I suggested he extended his site to take Bitcoin, but his main concern was how the taxes would be dealt with by the UK Inland Revenue / HMRC. Has anyone corresponded with HMRC on this, and are there any systems for keeping auditable records of payments made in Bitcoin?
Until this is clear, his attitude was the upside from having Bitcoin payments would have to be significant (>£10k revenue) for it to be worthwhile.

[lonelyminer (Peter Šurda)]

An article in The New Scientist from June 4th 2011 quotes HMRC in that Bitcoin is subject to capital gains tax when sold for official currencies but not other taxes. However, according to my analysis, it should be also subject to VAT (like barter) and income tax (like fringe benefits). The easiest way is in my opinion to charge the VAT like with any other currency and sell Bitcoins daily, and then treat the pounds as income. That way you avoid most taxation unclarities. The pounds you transfer from the exchange to your bank account show up on your statement and are evidence of your income.

[Isosceles]

Has any merchant had experience with this? I expect it would be hard to claim back VAT on a purchase made in Bitcoin?

[lonelyminer (Peter Šurda)]

Has any merchant had experience with this? I expect it would be hard to claim back VAT on a purchase made in Bitcoin?

If you're a merchant, you need to put the VAT into the invoice regardless of how you get paid by the customer (unless you're exporting outside of the EU): see http://www.hmrc.gov.uk/vat/managing/international/foreign-currency.htm (for foreign currencies) and http://www.hmrc.gov.uk/vat/managing/special-situations/samples.htm (for barter). So the legal status of Bitcoin does not affect the amount you're charging, it's the same as if using pounds or euros. The first link says that merchant needs to list the amount (net/VAT/gross) denominated in pounds on the invoice anyway.

If two VAT-registered companies are trading among themselves with Bitcoin, this is a bit more problematic. In other EU countries you do not need to charge VAT in this case, you just list the other party's VAT number on the invoice. Looking at the HMRC website, in UK it does not seem to be an option, only in specific cases. So you should charge VAT in this case, and the other party, if VAT registered, should be able to claim it back. Again, the units for calculation will be pounds and not bitcoins.

PS. I'm not a lawyer nor a certified accountant, but I've been researching Bitcoin and have some practical experience with EU invoicing / VAT.