You have an idea for starting a business or starting a project, but you need to raise funds to be able to get started. While loans, credit cards, and savings are the most traditional fundraising methods for your business, crowdfunding can be great if you have an idea that already has an audience of potential customers.
However, the money obtained from a crowdfunding campaign is not a loan, so will it be considered as income for your business? Do we have to pay taxes on crowdfunding income? Do I have to pay VAT on the amount?
Do you have to pay taxes on the money generated by a crowdfunding campaign?
Money contributed to your crowdfunding campaign could be considered donations. One might then think that it is exempt from tax. However, this is not entirely correct.
While there have not yet been HMRC surveys on crowdfunding, a few previous surveys related to fundraising and corporate giveaways suggest that any crowdfunding campaign related to funding the services offered by businesses would be highly regarded as business income.
However, if the crowdfunding income meets the criteria for a donation, then it may be exempt from VAT.
This means that your crowdfunding campaign will be counted in your sales.
As a result, you will have to pay personal tax (for self-employed) or corporation tax (for a limited company) on any increase in profits.
If the crowdfunding income is considered business income, it means that you have to consider VAT.
Are crowdfunding income subject to VAT?
If you offer the people who contribute to your crowdfunding campaign a consideration in exchange for their money, then their contribution to your campaign is considered as an advance payment for that reward and not as a mere donation.
In this case, if you are already registered for VAT, any income related to the rewards promised as part of the crowdfunding will be considered as VAT income.
If you are not registered for VAT, it means that your crowdfunding campaign will be counted towards your VAT threshold. The money collected could thus cause you to exceed the threshold of £ 85,000 over a period of 12 months.
Will VAT be charged if the crowdfunding income is related to a donation?
For payments to be considered a donation, your contributors must not receive any financial consideration in exchange for their money.
For example, if you reward your backers with rewards that do not include a delivery of goods as a thank you, no potential VAT provision has been made.
However, if the reward includes the delivery of a copy of the product for which you are crowdfunding, for example, the latter will be considered a potentially VAT supply so the entire “donation” will be included in your VAT Threshold.
When does crowdfunding income become income for VAT purposes?
The 12 month period during which the income will fall depends on the rewards you offer in exchange for the money.
If the counterparties are goods or services, the time of payment will be the date the income reaches your VAT threshold.
If the rewards are good, it depends. If the voucher is versatile, a £ 10 voucher to spend in your store for example, the date it counts towards your VAT threshold is the date your contributor uses them. However, if the voucher is £ 10 is only valid for purchasing a particular product, 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 a business?
If you think that the money raised by your campaign will cause you to exceed the VAT threshold or if the money you collect is likely to push you into the higher tax bracket (if you are self-employed), then this may worth considering the more traditional fund. Loans are in fact not considered business income and are not subject to VAT.
Crowdfunding is often used in startups, so it may be worthwhile to seek advice from an accountant who knows the startup world before launching your campaign.