PAYE for http?

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Participants in virtual worlds such as There and Second Life could shortly be liable to pay tax in real-world jurisdictions, according to Mark Simpson, tax director at Simpson Burgess Nash.

Online worlds are enjoying a surge in popularity and their economy has grown from $64m in September 2006 to nearly $600m today. "Residents" can create businesses to trade products and services such as virtual real estate, vehicles and advertising, while currency can be transferred into real money. In Second Life, which has a population of nine million, the currency, the Linden dollar, exchanges for about L$300 to US$1. The first person to become a real-world millionaire based on virtual-world trading was named earlier this year as Ailin Graef.

"It might seem surreal, but people are making significant sums in virtual worlds," Simpson said. "This is bound to arouse the interest of HMRC and other tax authorities. When they act, there will be no exceptions if you cannot pay what you owe."

According to Simpson, whose Second Life avatar is pictured above, there are a number of key issues to consider. "It will not be as simple as collecting income tax in the off-line world," he said. "Do you tax residents in the virtual world before or after they have converted their money to recognised currencies? If HMRC taxed virtual profits, it would have to accept payment in currencies such as Linden dollars. In the case of inheritance tax, does virtual wealth form part of the estate? Is VAT payable on goods that exist only on a server? And the issue of domicile and capital gains gets really complex: where do profits arise if the virtual world is based in the US, your business bank account is in Canada and you live in Manchester?"

Simpson advised UK virtual company owners to start keeping records and consider factoring in possible taxable income. A forthcoming report by the US Congress joint economic committee will advance the debate. Simpson's own firm is opening a practice in Second Life to address such issues, although it is based for most purposes in Manchester.