Is My Crowdfunding Campaign Income Taxable?
Crowdfunding has become a very common way to finance projects. The UK has experienced a sharp spike in equity crowdfunding volume since 2013, raising under £30 million to reach £550 million in 2020.
Businesses and individuals can access alternative funds for their projects via various crowdfunding platforms in the UK, such as Funding Circle, GoFundMe, Crowdcube, and Fundable.
However, it is essential to note that crowdfunding can come with tax implications and may attract VAT as well as income tax. This is keeping in mind that the HMRC already released VAT Notice 701/41, which informs on the VAT implications on sponsorships, including crowdfunding. Another resource is HMRC’s VAT Finance Manual, which covers the model types and VAT treatment of crowdfunding.
In the article below, we’ll help answer what happens when you raise funds through crowdfunding platforms like Kickstarter or Indiegogo.
Different Types of Crowdfunding
In general, there are four types of crowdfunding:
1. Donation-based Crowdfunding
- This involves the community coming together online to raise money for a social cause or a project which may or not be charitable.
- GoFundMe is a good example of a donation-based crowdfunding platform that has supported various social causes, such as relief support.
- The backer who is the donor doesn’t receive anything in return from the project.
2. Rewards Crowdfunding
- Rewards crowdfunding is common and involves backers making donations to a project in return for non-financial rewards. The donation is classified as an advance payment.
- However, the donor doesn’t receive an equity share, and the amount of rewards depends on the contribution received.
- The rewards can range from networking events to physical items.
- It’s a great alternative for start-ups to help launch their new products or services.
3. Debt Crowdfunding
- Debt crowdfunding, also known as peer-to-peer lending, is where a crowd (many investors) offers a loan to an early-stage business or individual.
- Compared to traditional bank loans, debt-based crowdfunding can potentially offer lower interest rates, friendly terms, and a faster approval rate.
- Unlike equity crowdfunding, the investors don’t have a share of ownership in the business; instead, they get back their repayment plus interest over a fixed period.
4. Equity Crowdfunding
- Equity crowdfunding is one of the most popular ways to raise funds in the UK.
- The investor will contribute money in return for a share in the project or venture.
- It is also possible for a business to offer other rewards as an incentive, which is proportional to the amount of contribution.
Tax Treatment of Crowdfunding: Are Crowdfunding Payments Tax Deductible?
- HMRC might consider donations to be a business’s income and therefore tax-deductible. If the money raised from crowdfunding campaigns qualifies as donations, where the contributor expects nothing in return, it is unlikely to attract VAT .
- As per the law, you are required to report revenue from crowdfunding on your returns. This includes gifts, which are considered taxable income.
- For donation crowdfunding, the backer cannot claim tax relief unless the project is a charity and if so, will be awarded in the form of Gift Aid. Further, as per inheritance tax law, the donation made by the backer is considered a potentially exempt transfer.
- There is no tax relief for rewards crowdfunding, as it’s an advance payment.
- As for debt crowdfunding, if the lender is a company, the taxing of interest payments or loan write-offs are provided under the loan relationship rules. Further, there is Social Investment Tax Relief for donations to a charitable project. Finally, if the loan cannot be recovered, there is a Capital Gains Tax relief on loans to traders.
- With equity crowdfunding, relief is available with Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). Moreover, if the equity shares report a loss or become devalued, capital gains tax or income tax loss relief is claimable.
Is there VAT on Crowdfunding?
- VAT treatment depends on whether something is expected in return per HMRC’s guidelines.
- If the donor doesn’t get any form of reward, then the money will qualify as a donation and will not be subject to VAT.
- VAT will become chargeable if it’s established that the rewards provided by the business constitute a vatable supply.
- However, as a potential new business launching via crowdfunding, the company may not reach the compulsory VAT qualification threshold.
- When reporting income for VAT, the time when your business pays the rewards in the form of goods and services is the date on which to add your income to the VAT threshold and may affect your VAT registration date. A recent ruling by HMRC against Lunar Missions Ltd shows the argument about the time of supply and date of redemption.
Get In Touch with Us
Crowdfunding campaigns are an alternative to grow your business to the next level, especially if you can’t access mainstream funding, such as your local bank. However, it is essential to familiarise yourself with the tax implications of each to ensure your business doesn’t suffer.
If you want to find out more about crowdfunding and whether it’s a good route for your business to raise finances, please don’t hesitate to get in touch. At DS Burge & Co Chartered Accountants, we can help advise you with all areas of business taxation.