Crowdfunding - Is it a taxable income?
Crowdfunding can be a super powerful tool for businesses that wish to start-up, grow or evolve however we find that there's often a lot of people that find themselves confused about whether crowdfunding is a taxable income, VATable or considered as a straightforward donation?
Read on to find out more.....
Are Crowdfunding Income Campaigns Taxable?
So you’re an entrepreneur with an idea for a business or project but need to raise some much needed capital to get you started, sound familiar?
Loans, credit cards and dipping into savings are the more traditional methods of raising funds for a business however, if you have an idea that already has an audience of potential customers, it can be tempting to try to use them to fund your project instead via Crowdfunding, avoiding the need to pay interest and even any of the loan back in the process.
But whilst having a “free” lump sum of money being paid into your bank account is wonderful, as it is not a loan, you may be left wondering -
‘Will it be classed as income for your business?’
‘Will you need to pay tax on your crowdfunding income?’
‘Will you have to pay VAT on the amount?’
Do you need to pay tax on the money generated by a crowdfunding campaign?
It’s all too easy to default to the view that the money paid into your crowdfunding campaign as donations and therefore is exempt from tax, but this is not strictly the case.
Whilst we aren’t currently aware of any HMRC investigations into crowdfunding campaigns as of yet, a few past investigations that relate to fundraising and gifts would suggest that any crowdfunding campaign that relates to business services would be heavily argued to be business income.
However, if the crowdfunding income meets the criteria of a donation, then it may be exempt from VAT, but it will still be treated as income within your business accounts.
This means that your crowdfunding campaign will be included within your sales at some point.
As a result, you will need to pay personal (if you are self-employed) or corporation tax (if you trade through a Limited Company) on any increased profits.
And if the crowdfunding income is considered to be business income, this means you need to start considering VAT.
Will you need to pay VAT on your crowdfunding income?
If you are offering your backers (the people paying into your campaign) a reward in exchange for their money, their contribution to your campaign is then considered an advance payment for that reward (rather than a simple donation).
So, if you are already VAT registered, this means that any income linked to rewards will be considered to be VATable income.
If you are not VAT registered, this means that your crowdfunding campaign will count towards your VAT threshold. Something would be very important to consider if the money received will push you over the VAT threshold in a 12-month period.
Will VAT be charged if your crowdfunding income is considered to be a donation?
For the payments to be considered a donation, your backers are not allowed to receive anything in return for their money.
For example, if you reward your backers with things such as naming something after them as a thank you, this is not a supply of goods, and so no potential VATable supply has been made.
However, if the reward is a copy of the item/voucher relating to the project you are crowdfunding for plus having something named after them, the item/voucher will be considered a potentially VATable supply so the whole “donation” will be included within your VAT threshold.
When does your crowdfunding income become income for VAT purposes?
The 12-month period that the income will fall under depends on the rewards that you have been offering in exchange for the money.
If the rewards are goods or services, then the time of payment will be the date the income goes towards your VAT threshold.
If the rewards are vouchers, then it depends. If the voucher is multipurpose (so £10 to spend in your shop for example) then the date they count towards your VAT threshold is the date your backer uses them. However, if the voucher is £10 to buy a particular product, then it is treated as a prepayment and the date it counts towards your VAT threshold is the date the voucher was purchased.
Should you use crowdfunding campaigns to raise funds for your business?
It’s hard to offer a universal answer to this question as there are many things to consider before arriving at the correct answer for you.Equally, you should never put the tax cart in front of the business horse, i.e never do something that may harm your business purely to avoid paying tax.
If you believe that the money raised by your campaign will push you over the VAT threshold or if the money that you raise will push you into the higher rate tax band (if self-employed) then it may be worth considering the more traditional fundraising methods to compare costs, as loans are not business income or VATable.
Should you have any questions regarding the above, please let us know. We'd be delighted to talk to you and assist.
Disclaimer: The information contained in this article is intended to be a guide and is not intended to be exhaustive. No action should be taken on the basis of information contained herein without obtaining the necessary advice. No responsibility can be accepted for loss or damages occasioned to any person acting or refraining from acting as a result of the material contained herein.