As crowdfunding becomes an ever-more popular source of investment, questions about the VAT implications inevitably rise – and not all crowdfunding businesses are aware of the situation. Because crowdfunding is a fairly new phenomenon, specific guidelines are not included in the UK VAT Act (1994) or the EU VAT legislation (2006). The European Commission (“EC”) VAT Committee has held discussions on crowdfunding to provide some guidance on the VAT liability of the different crowdfunding models available.
These guidelines affect all businesses engaged in crowdfunding.
This article explains what crowdfunding is, what guidelines have been agreed by the EC’s VAT Committee, and who is affected. The VAT Committee comprises representatives from every EU member state and the EC, therefore the position may change following Brexit.
What is crowdfunding?
Crowdfunding is the practice of raising finance for a project by receiving monetary funds from a large number of people (referred to as ‘contributors’ in this article).
The EC has outlined two different types of crowdfunding models: non-financial and financial, both of which can operate on reward, donation, investment and lending models.
Reward model: this is when the contributor expects goods or services in return for their money. For instance, many authors crowdfund book publication and, in return, contributors get a copy of the book or more.
Donation model: when contributors don’t get anything in return for their money, such as sponsoring a run.
Investment model: when contributors get a financial reward in return for their money, such as shares in a business.
Lending model: this is when the money provided by the contributor will be repaid – in essence, a loan.
Who pays VAT?
The VAT registration threshold is £85,000 revenue in a 12-month period (note, not a calendar or financial year – any rolling 12-month period), which means that any business or entrepreneur getting this amount of income or more will have to register for, and start paying, VAT. This includes crowdfunding activity.
Remember the time period: if you run two crowdfunding campaigns over 12 months and one raises £45,000 and the other £50,000, you’ll have exceeded the threshold.
In some cases, it can be beneficial to register for VAT even if your sales haven’t yet reached £85,000 a year. For guidance on registering for VAT, see our dedicated page.
What are the guidelines?
The VAT Committee confirmed that the VAT position will depend on the model used, and what is received by contributors in return for their financial support. The Committee agreed that crowdfunding activity – supplying services to entrepreneurs seeking investment – is an economic activity, and that it falls within the scope of VAT and must be taxable (unless what is provided consists of financial services).
The position changes slightly for each of the four models:
When a contributor gives funds to a crowdfunding campaign and receives a non-financial reward in the form of goods or services from an entrepreneur in exchange, this constitutes a taxable transaction for VAT purposes provided there is a direct link between the funding given and the supply of goods or services. (This is usually the case, as entrepreneurs will offer a menu of rewards depending on the amount of contribution.)
If the open market value of the goods or services is lower than the value of the contribution, this may be classified as a donation but only in cases where the benefit received by contributor is negligible or totally unrelated to the amount of contribution.
If the contributor to the crowdfunding campaign receives nothing in return for their contribution, this is classified as a donation and is not subject to VAT.
If the contributor receives a financial reward, the VAT liability will depend on the format of the reward. When the reward takes the form of participation in future profits by means of intellectual property rights, the transfer of such rights will constitute a taxable supply.
If the financial reward takes the form of securities (shares or bonds), this may constitute an exempt supply depending on the type of security.
If the contributor provides funding to the entrepreneur in the form of a loan, any interest received on these loans by the contributor is exempt from VAT.
Crowdfunding and VAT: rates overview
|Funding model||Contributor receives||VAT liability|
|Reward||Reward of goods or services where there is a direct link between supply and contribution made by contributor.||Standard rated at 20%|
|Goods and/or services with market value lower than amount of contribution and the benefit received is negligible or totally unrelated to amount of contribution.||Outside the scope of VAT (treated as donation)|
|Reward of goods forming part of the business assets of the entrepreneur other than goods applied for business use as samples or as gifts of small value, or of services that the entrepreneur carries out.||Standard rated at 20%|
|Donation||Nothing in return for contribution||Outside the scope of VAT|
|Investment||Future profits by means of IP rights||Standard rated at 20%|
|Securities (shares or bonds)||Exempt from VAT|
|Lending||Interest on loans||Exempt from VAT|
Where reward based crowdfunding is a taxable transaction and, assuming that the contribution is made before any goods or services are supplied in exchange, the contribution is regarded as a payment on account of goods or services. This means that VAT is chargeable upon receipt of payment, provided that the goods or services are identified when payment on account is made. If this is the case, VAT should become chargeable on receipt of payment and on the amount received.
We assume the same rules apply for investment based models where IP rights are provided, however this has not been explicitly outlined in the current guidance.
Who is affected?
These guidelines will affect all businesses involved in crowdfunding.
You need to be aware that if you supply any goods or services in return for financial support, these will be taxable supplies. These supplies may result in you exceeding the VAT registration threshold (currently £85,000) earlier than anticipated, sometimes before any goods have been shipped or services provided.
If you supply securities in return for the contribution, you will be making an exempt supply which could cause restrictions in input VAT recovery if already VAT registered.
The rules will also affect funders in some instances, so the rules are relevant to a variety of different parties.
If you have a query about crowdfunding or want to get specific advice in relation to a crowdfunding model used, please get in touch with Iain Masterton, Director of VAT at Chiene + Tait firstname.lastname@example.org or call 0131 558 5800.