‘Iain Masterton, director of VAT and indirect tax at Chiene + Tait , says that businesses looking to raise finance via the crowdfunding route should carefully consider the VAT implications before going ahead.
He says that if the crowdfunding pitch includes the funders getting a product in exchange for their funds then the business might be liable to VAT – something that should be taken into account when working out the funding requirement.
Masterton says: “There is a problem because there is no definitive guidance on offer from HMRC, something that people could refer to without going to an advisor so it does make it a bit of a grey area.”
He says that if the product provided in exchange for the funding is something that would have been liable for VAT on the sale of the good then VAT will be levied. This will not be the case on VAT exempt products such as food and children’s clothes.
“It’s a fact for a lot of these businesses that they haven’t taken VAT into account and they are suddenly faced with a bill from HMRC for 20 per cent of the value of the VAT-able goods sold.”
He says: “We worked for a company that was crowdfunding a board game they were developing. They were trying to put together a Dungeons and Dragons type board game and they had commitments from the UK, EU and non-EU funders.
“They had commitments of £90,000 from the UK which meant that they immediately went over the £85,000 turnover threshold and they were liable to VAT. HMRC were very good about it and didn’t give them a penalty payment but it meant that they were due to pay 20 per cent and that was something they hadn’t taken into account in the financial calculations.”
Masterton says that if the crowdfunding is set up as a loan or if the investor received equity in return for their investment then VAT would not apply; only if goods are exchanged for the investment that are liable to VAT.
Despite recent uncertainties, including Brexit and the triggering of Article 50, alternative lending has seen a sustained period of growth in recent years. For example, peer-topeer lending by volume reached over £100m by the start of 2017 according to alternative funding news website altfi.’
To read the full article in Business Insider, visit their website here.