Crowdfunding – watch out for the VAT

Crowdfunding can be implemented in two general ways. The first model sees a business ask investors for contributions to help fund it, and, in return, it will provide them with goods or services. But, because the business is giving the investor a good in return for the contribution, that income is subject to VAT (if the business is already VAT registered).
What this would mean for a UK business is that, assuming the goods are subject to 20% UK VAT, 1/6th of the investor’s contribution will immediately be lost to the taxman. There may be some way to mitigate this (such as classing the good as a gift or sample) but to do that would require some work by the business. This reduction in investment therefore must be factored into the businesses investment plan.

The second crowdfunding model differs from the first in that investors receive securities (shares or bonds, for example) or some form of intellectual property rights that will lead to a cut of future profits. The latter IP option is again likely to result in the contribution being subject to VAT, with the same consequences as outlined above.
Securities are different though, because they are often treated as being exempt from VAT. This means that any contributions would escape VAT, allowing the business to retain all of its contribution.
Nonetheless, and perhaps unsurprisingly, there is a corresponding downside to the securities route: which is that VAT costs that relate to exempt transactions are irrecoverable. So, although VAT may be saved on income received, it may also be lost on general costs. Tax authorities give with one hand but take with the other.

Potential crowdfunders need to consider these issues before committing to the process. It would also be sensible to check whether the platform being used to host the crowdfund will charge VAT as well; if it does, then the question of how to recover that cost also arises.

(by aeXea)

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