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    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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  • Request a callback

    Contact Form


    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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  • That’s so Meta

    1 June 2022

    As I wrote recently on our blog (1st November 2021 – “Crypto Tax Planning”), crypto activities are becoming ever more sophisticated. A year ago, our crypto clients were individual traders, buying and selling tokens for a profit. Now, we are advising metaverse developers, developers of GameFi projects and successful NFT artists.

    An area we are now focusing on with many clients is research and development. Blockchain is cutting-edge technology and so the space is ripe for this generous relief.

    For a small or medium company, a successful claim for R&D will result in 230% of qualifying expenditure being deducted from the bottom line for taxable profit or an immediate cash payment from HMRC of 33.35% of the expenditure for a loss-making company.

    A company spending £200,000 on qualifying activity would reduce taxable profit by £460,000. A loss-making company would be able to claim a cash payment of £66,700 instead.

    Innovation

    The building block of crypto is the blockchain and developers are now flexing its power and potential application.

    R&D is defined for tax purposes as a project which seeks to achieve an advance in science or technology through the resolution of scientific or technological uncertainty.

    The projects on which we are advising are all built on one or other of the current blockchains, such as Ethereum, Fantom or Polygon. Each blockchain has its own underlying code, is developed independently and is pre-existing. Thankfully, for R&D you don’t have to develop an entirely new technology – working with an existing technology to solve a novel problem or modifying or integrating it in a unique manner or developing a new and unique service could qualify just as well.

    To qualify for R&D relief, a company must meet a ‘two-limb’ test:

    • Is the company achieving a technological advance in the field of science and technology?
    • At the outset of the project, is there technological and scientific uncertainty, which the company would need to resolve to be able to achieve the advance?

    To illustrate, we can look to some of the casework we have been working on.

    Martian Premier League

    Martian Premier League are developing a football manager style game which will be deployed over the Polygon network. The Polygon network is an existing technology. Football manager style games have been a staple of footballer-wannabe-geeks for a decade or more. So, where is the R&D potential?

    An area being explored on this project is adapting the Polygon network technology so that it can support elements of the game. The developers are keen that the game will function entirely over the blockchain, rather than simply having elements of it (such as NFT’s representing players) existing on the blockchain as is the case for other blockchain games.

    This means that smart contracts will have to be developed to resolve and record events in the game (e.g., working out whether Team A or Team B win a match, calculating the impact of all the different characteristics of the players on each team and their impact on the gameplay).

    A similar problem is working out how players of the game will be able to invest earned exchange tokens to “train” their players, to improve different “skills”. Generally, the owner of an NFT is not able to change its characteristics, so this would be a clear innovation.

    Taking those discrete projects and holding them up against the definition for R&D, we can see a plausible case for there being a technological development. The developers here are taking the existing technology of the Polygon network code and working out how that code will allow these innovations to work. The project requires working through uncertainty; the team have an objective in mind but how it will be done and what the solution will look like (or indeed, whether it is actually possible) are all unknowns.

    In this case, the team have secured significant investment and so cashflow may not be a key concern. Being able to legitimately reduce profits for the purposes of tax means that our assistance in making a claim for R&D will make the project all the more viable and increase retained profit for future investment and development.

    The Metaverse

    An example of improved efficiency which could qualify for R&D can be seen in the case of more than one client who are trying to find ways to reduce gas fees on blockchain transactions.

    Every transaction on the blockchain requires a gas fee. For example, an interaction on the Binance Smart Chain (BSC) will require a small fee paid with BNB (the Binance exchange token). This is the fee awarded to miners who record transactions on the distributed nodes which make up the network. So, writing a smart contract and ‘uploading’ it to the blockchain will cost a fee, as will Interacting with that smart contract.

    In one case, the developer of a Metaverse environment intends to allow individuals to purchase virtual real estate, represented by NFT’s. Plots of that real estate will consist of many small chunks represented by those NFT’s, so each plot will have multiple landlords. The plots will be ‘rented’ by individuals or businesses who will be able to ‘build’ on them, creating shops, advertising spaces or whatever else their imagination and the technology allow.

    This kind of virtual estate management is not new (e.g., SecondLife, developed by Linden Lab in 2003). The introduction of the blockchain adds another level of technological challenge as well as clear advantages and added functionality.

    Returning to the metaverse project; each transaction requires a gas fee:

    • Renting out plots;
    • Distributing income to NFT holders;
    • Building on plots and so on.

    To achieve a seemingly simple transaction may require a sequence of complex smart contracts in the background.

    Gas fees are based on the data involved in the transaction; a complex smart contract will cost more than would a simple one. Accordingly, a project working on solutions to streamline the smart contracts for a transaction could well amount to a qualifying technological advancement.

    We have barely scratched the surface of the kinds of technological developments taking place in this space. Any blockchain developer should carefully consider whether the work they are doing would qualify for this extremely generous relief. It could be the difference needed for a successful launch.

    Get in touch with us today

    Call or email us any time or, simply fill out the contact form below and a member of our team will be in touch.

    Contact Form


    Please provide as much detail as possible in regards to the reason for your enquiry so our tax advisers can prepare and tailor their response to reflect your needs. We will endeavour to - respond / call you back - to discuss your enquiry and you will not be charged for this time.

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