The use of crowdfunding to raise funds has been on the increase since the concept was first coined back in 2006. A recent conversation with a couple of business owners who had just completed their crowd funding sparked this article as it was unclear that they fully understood the consequences of their fund raising exercise.
The principle of crowdfunding is to raise small amounts of funds from a large number of supporters or sponsors which are mainly achieved either via social media or a number of proprietary platforms.
There are three types of crowdfunding, donations (with or without incentives), debt and equity.
It is the first of these types that can cause potential problems.
Donations via crowdfunding
These are made by people who invest simply because they believe in the cause and in return may be offered an incentive such as an acknowledgement of the donation on a website or they could be offered a gift in return which could be the businesses product or service. The donation generally speaking will not be tax deductible for the donor with the exception of when the donation is made under gift aid to a charity or CASC.
To the recipient however the tax consequences can be more problematic. When the funds are used to finance business activities the question of whether the voluntary payment is actually a receipt of the trade must be carefully considered.
If, for example, a business raises funds from its subscribers to launch a new magazine the money paid is in effect an advance payment for the magazine which the subscribers may receive without any further payment.
There does not neccessarily need to be a trading relationship between the donor and the recipient to class the donation as trading income. In the case of CIR v Falkirk Ice Rink Ltd the company operated an ice rink on a comercial basis and provided curling facilities to the public for an admission fee. It also leased rooms to a club for a commercial rent. The club made a donation of £1500 to the company because it was concerned that it may not be able to continue to provide facilities for curling. The receipt was held to be taxable because the company used the donation to supplement its trading income.
A straightforward donation, as opposed to an advanced sale is unlikely to be a business supply so should fall outside the scope of VAT however, the VAT rules for a donation are more restrictive than those for corporation tax and other direct taxes and some items such as newsletters could disqualify it as a donation for VAT purposes.
HMRC have relaxed this test by allowing the recipient to acknowledge the gift in a list of donors, and annual report or similar or to provide a badge or certificate………anything else will probably mean the donation is vatable.
When there is an incentive provided for the donation eg a subscription, product or service of the recipient then the situation will become more complex.
Firstly the business could very well be, in effect, selling goods or services to its donors rather than simply receiving a donation. Each individual case is different and it is very important to consider carefully what is agreed between donor and recipient.
The likelihood is that, if goods or services are provided in return for the donation, then this will be a supply for VAT purposes and will also be considered as trading income for corporation and income tax.
A straightforward donation (as opposed to advance sales) is unlikely to be classed as a business supply for