HMRC are cracking down on crypto – here’s what employers need to know

Could the employment-related securities legislation apply?

Further employment tax charges can arise if cryptoassets that are acquired by reason of employment fall within the employment-related securities regime. This will be the case if the rights and restrictions conferred by the relevant cryptoasset bring it within the definition of a ‘security’ for these purposes.

As HMRC have yet to issue any specific guidance on when (if at all) they consider cryptoassets will be ‘securities’, their view on whether the employment-related securities regime could apply to cryptoassets is not currently clear. However, if the specific type of cryptoasset used to reward employees is a ‘security’ for these purposes, post-acquisition employment tax charges can arise in certain circumstances, including if the cryptoasset is subject to restrictions, is convertible into a security of a different description, or is sold for more than its tax market value.

Additional reporting obligations will also arise if cryptoassets acquired by reason of employment are ‘securities’.

Are the ‘disguised remuneration’ rules in point?

If providing cryptoasset-based employment reward involves parties other than companies in the employing group, PAYE and NIC obligations can potentially arise under the ‘disguised remuneration’ legislation.

Where these rules are in point, in certain circumstances they can potentially accelerate employer payroll withholding obligations (e.g. from when cryptoassets are transferred to employees to when they are instead ‘earmarked’ in advance of satisfying those awards).

Companies should carefully consider the interaction with the legal position here, particularly if an obligation to provide cryptoassets to employees is settled by another party. This may be a particular issue where tokens are issued from a legal entity elsewhere in an ecosystem which does not align with a traditional group structure.

What about tax valuation issues?

Valuing cryptoassets for the purposes of operating payroll withholding, or supporting employees with their personal tax reporting obligations, could present significant practical challenges. This is particularly the case where cryptoassets are thinly traded, volatile, subject to transfer restrictions, or traded across multiple exchanges at different prices.

Valuation can become even more challenging where employees are awarded tokens before a Token Generation Event (TGE). In these circumstances there may be little or no observable market data, which could require reliance on funding rounds, third-party transactions or other indicators to value those cryptoassets for tax purposes. However, care should also be taken where funding rounds or investor transactions are used as valuation benchmarks, as those investments may be subject to different lock-up periods, vesting arrangements, economic rights or other terms which affect comparability.

The current expectation is that the usual tax market value principles also apply to valuing cryptoassets. Whilst this provides an established valuation framework, it can raise difficult questions in practice where tokens have limited liquidity or trading volumes are very low. For example, it may not always be straightforward to determine the extent to which market depth, large holding sizes or other liquidity constraints should be reflected in the value adopted for tax purposes, particularly given the limited scope for applying ‘blockage discounts’ under traditional UK tax market value principles.

Given the potential for significant payroll withholding, corporation tax and reporting exposures if an incorrect value is used, employers should apply a consistent and supportable valuation methodology and retain contemporaneous evidence supporting the valuation approach, market data relied upon and any exchange rates used.

Planned changes in respect of stablecoins

HMRC have announced planned legislation in respect of stablecoins, which would take effect from April 2027 if enacted. Currently most of the announced changes revolve around the lending of stablecoins, but one key announced change would be the exemption of eligible stablecoins (broadly, those maintaining a stable value by being backed with a fiat currency) from capital gains tax (CGT) for individuals. This might be a change that employers would wish to communicate to their workforce as part of the employee communication strategy.

No other planned changes have been announced at present, including to the points discussed above.

What should employers do now?

Given HMRC’s increasing focus on cryptoasset tax compliance, employers that provide, or are considering providing, cryptoassets to employees should review their arrangements and confirm what payroll withholding and reporting will arise (and what communications might be required to raise awareness of employees’ personal tax obligations). Points to consider include whether:

• Any entities outside the employing group are involved in providing employees with cryptoassets (or funding to enable them to acquire cryptoassets) and, if so, whether this could give rise to unexpected employment tax charges under the ‘disguised remuneration’ rules;
• Cryptoassets acquired by employees are RCAs (and therefore subject to payroll withholding);
• The relevant cryptoassets are ‘securities’ that could be subject to post-acquisition employment tax charges under the employment-related securities rules and, if so, whether any steps can be taken to manage such exposures;
• The employer has robust systems and processes in place to ensure that all employment tax withholding and reporting obligations are met on a timely basis; and
• The interaction with corporation tax and the timing and valuation of any potential deductions for payments of cryptoassets to employees (and also contractors).

In addition the valuation of cryptoassets should be carefully considered.

How KPMG can help

KPMG in the UK advises employers on the design and operation of employee incentive arrangements, including those based on cryptoassets. We also help employers to review existing arrangements to identify and remediate any historical compliance risks and implement robust processes for future awards.

We are also hosting an event on Wednesday 23 September at Level 39, 1 Canada Square, Canary Wharf, London, between 8.30 and 11.00 on FCA authorisation for cryptoasset firms. This will start with a light breakfast and networking, followed by a keynote address from the FCA leading into a panel discussion covering key elements of authorisation including prudential and operational resilience requirements. There will be time for a Q&A, with the morning finishing with further networking and discussion. You can register for this event here.

Please contact the authors or your usual KPMG contact to discuss what these issues could mean for your business.

For further information please contact:

• Susanne Dixon
• Eddie Norrie