According to UK tax law, a key issue is whether the government decides to treat Bitcoin as currency or a good. So far, no pronouncement has been made yet by the British government one way or the other.

The HRMC, though, the United Kingdom’s tax agency, has indicated that it is classifying Bitcoins as vouchers, meaning paying VAT would be required upon sale.

That’s 20% in the UK, and such an add-on would strip all value out of Bitcoin exchanges there.

So reads a statement from HMRC: “Our Policy teams’ view is that these are not currency. It is our view that the provision of Bitcoins is the sale of vouchers. These are likely to be ‘single purpose’ vouchers.”

And without classification as legal tender, Bitcoins do not qualify for currency transaction exemptions.

While this news is bad for UK traders and investors, it also clouds the picture of Bitcoin’s possibilities in Europe.

Germany has already deemed Bitcoin “private money,” which was hailed by many for simply being recognition from any EU state. That does not solve taxation questions in Germany, but it is at least legitimacy, an important consideration as the currency matures.

If Bitcoins are regarded as goods, as anecdotal evidence suggests is happening in Sweden, then the entire volume of a trade is subject to VAT. This would make Bitcoin trading prohibitively expensive.

Back to the UK: businesses there only have to register for VAT collection when they cross a threshold of 79,000 GBP in turnover. So businesses face a cap on reasonably priced trades with or without the voucher designation.

Complicating that problem is the stance most banks in the UK take toward Bitcoin. In short, they’re undecided, but most are unwilling to deal with the cryptocurrency at the moment. What’s more, few banks are forthcoming about why, and in one post on the Scirra.com blog, a bank representative is quoted as saying they weren’t willing to divulge “trade secrets.”

Such mystery and nebulous threats of tax liabilities could have a cooling effect on the Bitcoin industry in the UK. Europe as a whole has an interest in these developments, too, as many tax laws are harmonized across the European Union, of which the UK is a member.

In the meantime, UK businesses are free to submit an argument to HMRC regarding VAT treatments under current laws.