An Overview of the Legal and Regulatory

Framework for Complementary Currencies

in the United Kingdom
Introduction

The UK has long been a hotbed of currency innovation. the first established in the
1990s, LETS systems are now estimated to be used by over 400 different groups. The
country then became the first location outside the US to follow the Timebank
methodology of Edgar Cahn, with approximately 75 different timebank systems now in
operation. This model was then further developed at South Wales Community Currency
Research Institute to create the Timecredits model. In the 1990s, the UK also saw the
emergence of business-oriented closed-loop payment systems, focused on making
barter and mutual credit work in the business environment. A fourth wave of innovation
saw the introduction of the local currencies aiming to regenerate the local economy, with
the first being the Eko in Findhorn and the newest and biggest being the Bristol Pound.
All of these systems face a variety of legal and compliance issues that need to be
addressed in order to operate a sustainable and successful currency. This document
looks at six key areas of law:
i.
ii.
iii.
iii.
iv.
v.

Taxation
Social Security and Employment
Financial Services, Money Laundering and Note Printing
Insurance
Data Protection and Health and Safety
Public Sector acceptance of the complementary currencies

The document will analyse how versions of the 4 generic currency models outlined
below are affected by the relevant legislation:
1.
2.
3.
4.

LETS
Timebank
Legal Backed Tender Currency
Closed Loop Payment System


Disclaimer

This document only offers an overview of the legal landscape that complementary
currencies operate within and nothing contained herein should be considered legal
advice.
Only the most generic systems are covered. Deviation or hybrid models may alter
liability, obligations and compliance options.

This report has been produced by the New Economics Foundation as part of the Community
Currencies in Action (CCIA) collaboration project.
CCIA is a transnational partnership project designing, developing and implementing
community currencies across northwest Europe. The partnership provides a rigorously
tested package of support structures to facilitate the development of currency initiatives
across NWE, promoting them as credible policy vehicles.
Running from May 2012 to June 2015, CCIA is part-funded through the INTERREG IVB
North West Europe Programme, a financial instrument of the European Unions Cohesion
Policy Investing in Opportunities.
Find out more about CCIA on our website:

www.communitycurrenciesinaction.eu


1- Local Exchange Trading Systems (LETS)

i.

Taxation

When discussing the taxation implications of particpating in a LETS, it is useful to

distinguish between those who engage in the schemes to offer services in line with a
persons normal line of commercial work and those who do so outside of work, more as
social activity. Most LETS schemes are predominantly comprised of individuals engaged
in social exchanges - that is, the latter of these two groups.
There is clear guidance from Her Majestys Revenue and Customs (HMRC) (NIM02215)
that goods and services that are exchanged through LETS systems should be counted
as income or revenue for tax purposes. They consider that the value of nonexchangeable credits could be calculated either by using the set rate implemented by
the scheme, where this exists, or by considering

how the number of credits is decided

whether the number of credits earned vary with the type of service provided

the value of the credits in terms of what they buy in the scheme

what the average local rate of pay is for the work performed. (NIM02215)

Although these rules apply equally to those engaged in a professional capacity as those
who do so in a personal capacity, it is hard to see how an individual who occasionally
walks a neighbours dog or drives someone to bingo could record these transactions.
Therefore, it is principally those participating in their professional capacity who should
consider LETS exchanges part of any income tax or self-employment declaration as well
as part of corporation tax, depending on how the person or business is registered with
HMRC.
Importantly, however, if the income and expenditure balance out (which is, after all, what
the LETS model is all about), there is no net profit to report. If the LETS group itself is a
not-for-profit community association, legally termed an unincorporated association then
it is not required to register anywhere nor complete a corporation tax return to HMRC. All


that is required is to establish a constitution with a set of clear rules by which the
association will be governed. Any other form of company structure is likely to trigger
registration and reporting requirements.
ii.

Social Security and Benefits

Although HMRC recognises that many people who use LETS schemes are not
employed, there is little guidance from the Department of Work and Pensions (DWP) on
how activity conducted within LETS could affect a persons ability to claim various forms
of welfare.
For those claiming unemployment benefit, the best advice to administrators is to make
the potential impact should clear and encourage claimants to contact their DWP
representative. The only publicly available evidence of how this might be treated is a
statement in Hansards from 2000 given by the Parliamentary Under-Secretary of State
for Social Security, who stated that a person who undertakes less than 16 hours of work
a week on average and earns less than 280 per year in a LETS system should be able
to do so without affecting their benefits. It is of course also vital the person remain
available for work. LETSLINK UK provide a useful document to help mitigate against
the problem of availability.
With regard to people claiming disability allowance, there is consensus that their
participation can pose a risk to their receipt of benefits, since it may demonstrate an
ability to work. With help and where appropriate, however, the work can be described as
therapeutic work, which would reduce the risk to the recipient of any impact on their
status.
iii.

Financial Services, Money Laundering and Note Printing

Financial Services regulations and money laundering requirements do not apply to LETS
systems.
Should the system wish to print physical notes, legally defined as vouchers, then it is
important that, at a minimum, basic security features are implemented and that it is very
clear that they are not interchangeable with legal tender notes.

iv.

Insurance

All currency projects that deal directly or indirectly with the public require public liability
insurance. This covers the currency operator for any damages awarded to members of
the public, volunteers or customers for injury, illness, disease or damage to their
property which is sustained as a result of negligence during the operators business
activity.
LETS scheme administrators should also consider their other liabilities and either be
aware of the risks or indemnify themselves against such risks through an insurance
policy.
v.

Data Protection

The 1998 Data Protection Act makes provision for the regulation of the processing of
information relating to individuals, including the obtaining, holding, use or disclosure of
such information. Where the currency operator stores any personal information, it is vital
that appropriate technical measures be taken to ensure the protection of this data onand offline. It is also considered best practice to have an internal data-protection policy.
Not-for-Profit organisations which only collect and share information with people and
organisations as far as is necessary to carry out the purpose of the organisation do not
need to register under the Data Protection Act. A self-assessment questionnaire is
available for those unsure as to their obligations.
vi.

Public Sector accepting Community Currencies

In general, LETS currency cannot be exchanged for goods and services within the public
sector.

2- Timebanks

i.

Taxation


Since most timebanks operate between individuals, the issue of corporation tax does not
raise any concerns. However, where the exchange is performed between businesses,
the situation may be different.
From an institutional perspective, provided the organising body does not generate profit,
the consideration of corporation tax will not apply. Where the timebank is being run for
profit and the time credits have a monetary value, corporation tax will need to be
considered.
For the purpose of income tax, the participation of individuals in a timebank is not
considered remunerative work, but is instead analogous to volunteering. This has been
confirmed by DWP guidance, which states that work carried out under the Time
Exchange Scheme is not classed as remunerative work and it is input jobseekers
allowance payment sytsem in exactly the same way as volunteering. For business-tobusiness (B2B) timebanks, any value accrued should be dealt with as corporate profits,
where applicable. Value Added Tax (VAT) should be applied according to the normal
rules. The fact that the transaction is taking part within a B2B timebank should not alter
the requirement for VAT to be charged.
ii.

Social Security and Benefits

Credits (Hours) that are earned through a Timebank are not taxable income as long as
it only records the time exchanged between its members and the hours cannot buy
goods or retail services. In such cases, it is very difficult to assign time credits an
equivalent cash value.
The DWPs Time Exchange guidance states that Participation in a time-exchange
scheme is not voluntary work, but as the nature of the scheme is not to make any
payment in cash, it is treated in the same way as voluntary work as far as the effect on
Job Seekers Allowance (Incapacity Benefit) is concerned and that work carried out
under the Time Exchange Scheme is not classed as remunerative work.


While answering a question on time exchange schemes, Angela Eagle, the
Parliamentary Under-Secretary of State for Social Security, stated to the House of
Commons on June 15 2000: Time credits derived from participation in a time exchange
scheme ... do not constitute earnings.
In the UK, people are free to volunteer while receiving benefits. Thisapplies as long as
the work done is unpaid and the rules under which benefits are received are met.
Volunteering should not affect the right to benefits, at least as long as the only money
received is to cover volunteering expenses, such as travel.
There are no limits on the amount of time one can volunteer, as long as the conditions
for the receipt of the relevant benefits or tax credit continue to be met.
For example, if one receives Jobseekers Allowance, it is necessary to

still be actively seeking a full-time job

be able to attend job interviews at 48 hours' notice

be available to work at one weeks notice.

In addition, Disability Benefit claimants in the UK need to demonstrate that they are unfit
for work. As with voluntary work, it is important that participation in a Time Credit
Network does not suggest otherwise, as this could lead to agencies reassessing the
benefits to which a person is entitled.
Where the time credits have a cash value, as in the cases where hours can be used to
purchase goods and services at a fixed or established exchange rate, then the above
reasoning may not apply. Under these circumstances, earning hours could prejudice a
claimants position.
iii.

Financial Services , Money Laundering and Note Printing


Where a timebank issues physical notes, this is done in the legal form of a voucher
which is clearly differentiated from a legal-tender banknote. The voucher represents a
promise to accept it in exchange for goods and services from specified supplier(s) and
cannot be redeemed for cash. The precise nature of the paper vouchers will typically be
governed by the terms and conditions to which users have subscribed. These should
make clear the status of the vouchers and the restrictions on their convertibility into
Pound Sterling.
It is also important to ensure that appropriate safeguards (holograms, watermarks etc.)
are implemented to ensure that the vouchers are hard to counterfeit.
iv.

Insurance

All currency projects that deal directly with the public will require public liability
insurance, which covers the currency operator for any damages awarded to members of
the public, volunteers or customers for injury, illness, disease or damage to their
property which is sustained as a result of negligence during the operators business
activity.
Currency operators should also consider the other liabilities of the board and either be
aware of the risks or indemnify the board against such risks through an insurance policy.

v.

Data Protection

The 1998 Data Protection Act makes provision for the regulation of the processing of
information relating to individuals, including the obtaining, holding, use or disclosure of
such information. Where the currency operator stores any personal information, it is vital
that appropriate technical measures be taken to ensure the protection of this data onand offline. It is also considered best practice to have an internal data protection policy.
Not-for-Profit organisations who only collect and share information with people and
organisations as far as is necessary to carry out the purpose of the organisation do not


need to register under the Data Protection Act. A self-assessment questionnaire is
available for those unsure as to their obligations.

vi.

Public Sector Acceptance of CCs

There is a proven track record of users of timebank exchange systems being able to
exchange time credits for municipal services which are time-based.
The organisation Spice has manage to get its time credits exchanged for the followed
services:
- Swimming, gym and other leisure activities at local authority run leisure centres
- DVD and CD hire at local authority run libraries
- Entrance to tours and talks at local authority run heritage centres
- Entrance to shows at arts venues run by, or in partnership with, local authorities
- Entrance to exhibitions and general admission to museums run by local authorities
This has been achieved through Spices partnership arrangements. Strong partnerships
are formed with 'host' organisations, such as local authorities, which facilitate access to
municipal services. No cash is exchanged through the system. One Time Credit =
access to a one-hour activity.


3- Legal Tender Backed Currency
i.

Taxation

Legal backed tender currencies are classed as a face-value credit voucher for tax
purposes, since they are sold at face value and redeemed for real goods and services.
Credit vouchers are defined as vouchers that are issued by a person who cannot
themselves redeem them for goods or services. Instead, the issuer undertakes to give
complete or partial reimbursement to whoever does redeem the voucher.
With regard to VAT, this is not due on the actual sale of the vouchers since they are sold
at face value. However, VAT is due from the businesses that redeem these vouchers.
When the vouchers are used/redeemed for goods and services, the value for VAT
purposes is the full face-value amount. To encourage compliance with VAT law, all
operators of legal backed tender currency should notify businesses who accept the
currency that VAT is due as normal on all goods and services they sell, including those
sold for complementary currencies.
With regard to corporation tax, the operating entity, often a Community Interest
Company (CIC) or Co-operative, will be responsible for paying all required corporation
taxes, just like any other company. It is considered good practice to notify all limited
companies and other organisations, including clubs, societies, associations and other
unincorporated bodies who accept the currency, that they must pay corporation tax on
their income whether it is in the complementary currency or in sterling. This also applies
to self-employed people and business partnerships.
With regard to Income tax, for businesses that accept legal backed tender currencies,
there are two types of income tax considerations: tax paid by businesses on workers
salaries; and self-employment tax paid by sole traders and business partnerships.
Although the exact classification under the law may be under debate, the fact that PAYE
tax is due on any salary earned in legal backed tender currency is not. For those who
are self-employed, all income must be reported to HMRC, regardless of whether this
income was earned in sterling or in any other currency.


It is very important to note that all of these tax payments need to be made in legal tender
and cannot be completed in the complementary currency. However, in the case of the
Bristol Pound, both Business Rates and Council Tax can now be paid to the local
authority in the local currency.
ii.

Welfare and Employment

Individuals receiving legal backed tender currencies in exchange for performing work will
count such income as earnings. This will therefore have an impact on any benefits they
receive. Thus, it is vital the recipients are made aware that all such currencies are a
source of income and must be declared.
If individuals receive legal backed tender currencies for their voluntary participation in
community activity they will be treated as notional earnings. Acccording to HMRC: The
benefits system treats rounded up expenses as earnings and some other non-cash
payments such as vouchers as notional earnings or actual earning. The volunteer would
be treated as in paid work and their earning will be taken into account against their
benefits which may affect benefit payment. Rounded up expenses may also be treated
as earnings by HM Revenue and Customs
Therefore, anyone receiving legal backed tender currencies on a regular basis whilst in
a voluntary capacity needs to be aware this payment could be treated as notional
earnings and impact any benefits they receive.
One-off gifts in local currency will not affect any benefits nor be described as payment
for work under the Minimum Wage Act. Depending on the amount and their timing they
may be allowable under the inheritance taxation rules without tax being paid by an
estate.
An individual receiving disability living allowance would not be able to earn legal backed
tender currencies in the same way they might earn Time Credits on a regular basis.
They would only ever be able to receive Brixton Pounds, for example, as a one off thank
you for participation. Beyond this, payment in legal backed tender currencies could be


counted as notional earnings. Any individual in receipt of disability benefits should
discuss any changes in activity (volunteering etc) with their employment advisor.
iii.

Financial Services Law

The current legislation in the UK states that only the Bank of England is able to print
banknotes (as well as three banks in Scotland and four in Northern Ireland); therefore,
those wishing to print legal backed tender currencies have to do so as credit face-value
vouchers as stated above. Guidance from the Bank is that all such vouchers should
have an expiry date printed on them. They should, ideally, also be clearly
distinguishable from Bank of England notes to avoid any possible confusion. There is,
however, no other current legislation that deals specifically with the printing of paper
vouchers to be used as a local currency, although they should contain all necessary
security devices and in practice, are likely to be printed by specialist bank note printers.
In order to combat money laundering, it is vital that there is a strong know your
customer system is in operation and that all suspicious activity is reported in a timely
manner to the relevant authorities. For activity being done in cash there is a legal
requirement that authorities be informed of all suspicious activity. Most community
currencies in operation are relatively small scale and are of little value to money
launderers and are consequently very rarely used for this purpose. For electronic
accounts, it is vital that customers are properly identified using appropriate
documentation when opening an account. It is then also important to ensure that the
correct triggers are put in place to inform authorities of suspicious online transactions.
In addition, currency operators will need to consider whether they fall within the Payment
Services Regulation or the E-money Directive. The decision tree shown below can help
guide any assessment of the need to comply:

Legal backed tender currencies that issue vouchers are specifically excluded from the
UK Payment Services Regulations in Schedule 1 Part 2 (g). However, the operations to
manage the funds generated by the exchange of sterling into the new currency may
generate obligations under the Payment System Directive. Therefore, currency
operators should mainly concern themselves with compliance with the E-money
regulation.


There are 3 ways to meet the requirements.
1) Register as a E-money Issuer
A currency operator can register as a small e-money issuer (SEMI) with the Financial
Conduct Authority (FCA). A SEMI is defined as an issuer with an average ourstanding
value of e-money less than Euro and less than 3 million monthly average transactions.
As a SEMI, there are reduced capital requirements, but the reporting requirements
remain the same. At present no UK currency is registered as an E-money issuer.
2) Partner with an organisation (eg Credit union or Bank) that is already registered
Partnering with a registered organisation, like a credit union, can be an easier option for
the currency operator and is the model that Bristol Pound has pursued.
3) Use the limited network exemption.
Under certain circumstances, it is possible for currency operators to use the limited
network exemption contained in the legislation. This states that where the issued emoney can only be used in a limited network of service providers or for a limited range
of goods and services then the currency operator need not register with the FCA.
Unlike in other European countries, the UKs FCA does not give grant official
exemptions and so a currency operator using the exemption can still potentially be
prosecuted at anytime, especially if any of the parameters of the currency change. There
the experience of the Bristol Pound provides relatively clear guidance that any currency
operating in an area described as a town or city cannot avail themselves of the
exemption, although it may apply to a currency limited to a specific geographical area of
that town (such as the Brixton Pound).
iv.

Social Security

All currency projects will require public liability insurance, which covers the currency
operator for any damages awarded to members of the public, volunteers or customers
for injury, illness, disease or damage to their property which is sustained as a result of
negligence during the operators business activity.


Currency operators should also consider the other liabilities of the board and either be
aware of the risks or indemnify the board against such risks through an insurance policy.

v.

Data Protection

The 1998 Data Protection Act makes provision for the regulation of the processing of
information relating to individuals, including the obtaining, holding, use or disclosure of
such information. Where the currency operator stores any personal information, it is vital
that appropriate technical measures be taken to ensure the protection of this data onand offline. It is also considered best practice to have an internal data protection policy.
vi.

Public Sector Acceptance of Community Currencies

In the UK, there is no legal issue for public authorities accepting legal backed tender
currencies for municipal services and taxes. The local authorities in Bristol and Brixton
already accept local currencies for business rates (business tax payments), business
licences, and some other municipal services. In addition, the Bristol Pound has been
accepted for Council Tax since April 1st, 2015. The main difficulty has come from
systems integration, since there are complex systems that administrate the different
business units/departments within local government, and often these systems are
outsourced to third parties.
The major factors in encouraging local government acceptance of legal backed tender
currencies has been the tax-free convertibility to sterling and the participation in what
has been proved to be a scheme to encourage the local economy and shorten supplychains. While, ideally, the Council hopes to recycle/recirculate most of the legal backed
tender currency accepted via routes such as Payroll and small contracts, the safety
valve of exchanging into sterling allows the Council not to worry about the build-up of a
supply that cannot be used.


4- B2B Closed-loop currency systems
i.

Taxation

Under the standard model, these currency systems specify a peg for the newly created
currency, usually to national legal tender.
All transactions within the system are considered part of the normal economy and,
therefore, VAT should be charged on all transactions at the applicable level. Similarily,
all trade done through these systems should be counted as income for the purpose of
the reporting of corporation tax. If a self-employed person engages in trade within a
closed loop system, then it should be included in their tax declaration.
ii.

Social Security and Employment

These systems are focused on facilitating trade between businesses and so concerns
about social security implications should not arise.
If a person were to receive such a currency as part of their wage, then it should be
accounted for in the same way as legal tender, along with all the implications that this
has with regards to receipt of benefits and taxation.
iii.

Financial Services

These systems do not normally come under most financial services regulation since the
currencies are non-convertible into national currencies, the systems generally do not
produce any paper notes and the fact thatone cannot buy into the system, but instead
must trade to participate.
The one area of concern for operators is to ensure that the system is not used for money
laundering. It is therefore vital that appropriate safeguards and policies are put in place.
iv.

Insurance

All currency projects will require public liability insurance, which covers the currency
operator for any damages awarded to members of the public, volunteers or customers


for injury, illness, disease or damage to their property which is sustained as a result of
negligence during the operators business activity.
Currency operators should also consider the other liabilities of the board and either be
aware of the risks or indemnify the board against such risks through an insurance policy.
Since insurance companies are likely to be unfamiliar with complementary currencies, it
is likely that they will require additional detail in order to be able to accurately calculate
the risk and provide an accurate quote
v.

Data Protection

The 1998 Data Protection Act makes provision for the regulation of the processing of
information relating to individuals, including the obtaining, holding, use or disclosure of
such information. Where the currency operator stores any personal information, it is vital
that appropriate technical measures be taken to ensure the protection of this data onand offline. It is also considered best practice to have an internal data protection policy.
Not-for-Profit organisations who only collect and share information with people and
organisations as far as is necessary to carry out the purpose of the organisation do not
need to register under the Data Protection Act. A self-assessment questionnaire is
available for those unsure as to their obligations. -

vi.

Public Sector Acceptance of CCs

Public sector goods and services do not normally form part of these kinds of systems.