Individuals seeking funding through crowdfunding platforms should be wary of the tax consequences of a successful pitch, say London Chartered Accountants Blick Rothenberg LLP.
Robert Pullen, Personal Tax Manager at Blick Rothenberg, says: “Credit has become an increasingly scarce and expensive commodity during and following the financial crash. Individuals looking for investment funding have therefore turned to the public, in the form of crowdfunding.
“As crowdfunding is a relatively new phenomenon, the UK tax legislation has not yet caught up and the process involved can have surprising outcomes.
“An individual who receives funding through crowdfunding platforms would be forgiven for thinking that the funding is tax-free – after all, there is no guarantee of a return for those who are pledging their money and they are not taking a stake in the project.
“However, where the project is a business proposal, for example, in order to manufacture phone cases (to take an example of a project that is currently available to pledge money to) the receipt of pledge money is treated for UK tax purposes as income, taxable on the project creator after deducting allowable business expenses including the platform’s cut, at up to 47 per cent for an individual or 20 per cent for a company. As the pledge money is only released if the set funding target is met, the tax point is the receipt of the funds.”
Not only that, but because pledge money is treated as income (or more specifically, turnover), VAT may be payable on the amount received, if the project creator is a business and the turnover exceeds the VAT registration limit, currently GBP83,000.
Pullen says: “The consideration for VAT purposes is not as simple as taking the total pledge money, especially if the rewards being offered are of a token value only. If the rewards are specified (for example, a free phone case) and can be valued then it might be possible to ensure that VAT was only payable on their value with the balance treated as outside the scope funding.
“However, if you only qualify for a particular reward if you pledged a certain amount then VAT could be due on the full amount even if the reward is of a much lower value than the money pledged.
“Projects launched on crowdfunding platforms typically have a set funding target but no upper maximum, and a modest target of say GBP6,000 can quickly generate upwards of GBP100,000 if it is popular. Individuals seeking funding through crowdfunding platforms must therefore be careful and keep in mind the tax consequences of a successful pitch.”