Crowdfunding websites such as Kickstarter, GoFundMe, Indiegogo, and Lending Club, Seedrs, Crowdcub and more have become increasingly popular for both individual and business fund-raising for capital to help project them through to the next phase of their business ventures. The upside is that it’s often entirely possible to raise the cash you need, but the downside is that there are certain critical accounting implications that go along with crowdfunding that many business owners overlook.
The UK Crowdfunding Association defines crowdfunding as “a way of raising finance by asking a large number of people each for a small amount of money. Traditionally, financing a business, project or venture involved asking a few people for large sums of money. Crowdfunding switches this idea around, using the internet to talk to thousands – if not millions – of potential funders.”
Ensuring your business is compliant and aware of all the potential pitfalls associated with overlooking critical commitments, we’ve put together a quick guide to highlight what you need to know.
Income Tax: crowdfunding and Individual Savings Accounts
In August 2016, the UK Government published a policy paper that outlines the implications of crowdfunding on income tax and individual savings accounts, stating that interest, gains and other payments from certain debt securities offered via a crowdfunding platform would now qualify for new tax advantages where these investments are held in an innovative finance Individual Savings Accounts. This new proposal was likely to affect individual investors in debt securities (such as bonds) offered via a crowdfunding platform and the businesses and charities that issue or arrange these investments. For more information about the policy itself, click here.
Donations and Tax implications
Donation Crowdfunding refers to initiatives where people invest simply because they believe in the cause. These are often in the form of donations towards an individual raising funds for a larger initiative, for example Cancer Research or other such charities. It may even be raising money to help an individual out of a difficult situation or to fund a particular activity. On occasion, investors are often rewarded with crowdfunding ‘rewards’, and come in all shapes and sizes. They may be an acknowledgement in a book, or special entry to an event, free gifts and more. Most of the time, those who are donating purely because they believe in a cause do so freely without expecting anything in return.
Ross Martin explains that unless the project is a charity, no tax relief is available to the backer. If it is a charity, Gift Aid can be claimed. In the UK, Gift Aid is a scheme enabling registered charities to reclaim tax on a donation made by a UK taxpayer, effectively increasing the amount of the donation.
In the case of donations made via crowdfunding platforms, tax relief can be lost if a benefit is provided to the backer, with the limit depending on the amount of the donation.
Rewards from Crowdfunding Initiatives
In the case where an investor, or ‘backer’ makes a contribution with the expectation to recieve a reward in return, the contribution is considered an advance payment for the reward which will be received. Under these circumstances, a supply is being made. This means, according to Martin, that “the VAT position needs to be considered and, if VAT is due, any contribution will be deemed to include output VAT. The rewards themselves will also determine the Time of supply and may affect the VAT registration date.”
Debt Crowdfunding and Tax
Debt crowdfunding involves the process of receiving investments back, with interest. Also known as Peer-to-Peer lending, it bypasses traditional funding means (banks) to allow for the lending of money. Returns are usually financial, but investors have the added benefit of continued opportunity to contribute to the success of the idea they’re investing in. This type of crowdfunding is regulated by the Financial Conduct Authority (FCA). In the case where the lender is an individual, special rules apply for interest. However, when the lender is a company, the tax treatment of its debits and credits fall within the Loan Relationship rules.
If the project itself is charitable, including something like a Community Investment Company or Community Benefit Society) Social Investment Tax Relief may be available.
Equity crowdfunding and tax
Equity crowdfunding occurs when people invest in an opportunity in exchange for shares or a small stake in the business, project or venture. This type of crowdfunding is also regulated by the FCA. Tax relief on equity investment may be available under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS).
Things to consider:
Boox paints this picture a little clearer still.
“If a business raises money through crowdfunding, giving its funders goods or services in return, it’s hard to see how this wouldn’t make the ‘donation’ taxable income for both direct (income or corporation) tax and indirect (VAT) tax.
While the donation may be completely voluntary and might not be to gain whatever’s offered in return, the law says that if a trader receives a voluntary donation towards their business expenses, it’s a taxable receipt of trade.
If the donation results in an exchange of goods or services – even as a “gift” – the position is even clearer. The trader has received money and then gives the payer its services or some of its trading stock. This is a trading transaction.”
Are you involved in crowdfunding initiatives – either as a business looking to raise capital, or an investor looking for the next big project, but not sure of the implications of your involvement, then the CFPro Team can help. Get in touch today.