So, you have an idea for a business or project but need to raise some money so you can get started.
Loans, credit cards and dipping into savings are the more traditional methods of raising funds for your business.
However, if you have an idea that already has an audience of potential customers, it can be tempting to use them to fund your project instead. Avoiding the need to pay interest and even any of the loan back in the process.
But whilst having a “free” lump sum of money being paid into your bank account is wonderful, as it is not a loan, will it be classed as income for your business?
Will you need to pay tax on your crowdfunding income?
And could you have to pay VAT on the amount?
Do I need to pay tax on the money generated by my crowdfunding campaign?
It is all too easy to default to viewing the money paid into your crowdfunding campaign as donations and assume that it is exempt from tax, but this is not strictly the case.
Whilst there have been no HMRC investigations into crowd funding campaigns as yet, a few past investigations that relate to fundraising and gifts would suggest that any crowdfunding campaign that relates to business services would be heavily argued to be business income.
However, if the crowdfunding income meets the criteria of a donation, then it may be exempt from VAT, but it will still be treated as income within your business accounts.
This means that your crowdfunding campaign will be included within your sales at some point.
As a result, you will need to pay personal (if you are self employed) or corporation tax (if you trade through a Limited Company) on any increased profits.
And if the crowdfunding income is considered to be business income, this means we need to start considering VAT.
Will I need to pay VAT on my crowdfunding income?
If you are offering your backers (the people paying into your campaign) a reward in exchange for their money, their contribution to your campaign is then considered an advance payment for that reward (rather than a simple donation).
So, if you are already VAT registered, this means that any income linked to rewards will be considered to be VATable income.
If you are not VAT registered, this means that your crowdfunding campaign will count towards your VAT threshold. Something that that would be very important to consider if the money received will push you over the £85k threshold in a 12-month period.
When does your crowdfunding income become income for VAT purposes?
What 12-month period the income will fall under depends on the rewards that you have been offering in exchange for the money.
If the rewards are goods or services, then the time of payment will be the date the income goes towards your VAT threshold.
If the rewards are vouchers, then it depends. If the voucher is multi-purpose (so £10 to spend in your shop for example) then the date they count towards your VAT threshold is the date your backer uses them. However, if the voucher is £10 to buy a particular product, then it is treated as a prepayment and the date it counts towards your VAT threshold is the date the voucher was purchased.
Will VAT be charged if my crowdfunding income is considered to be a donation?
For the payments to be considered a donation, your backers are not allowed to receive anything in return for their money.
For example, if you reward your backers with things such as naming something after them as a thank you, this is not a supply of goods, and so no potential VATable supply has been made.
However, if the reward is a copy of the item/voucher relating to the project you are crowdfunding for plus having something named after them, the item/voucher will be considered a potentially VATable supply so the whole “donation” will be included within your VAT threshold.
Should I use crowdfunding campaigns to raise funds for my business?
I’m not going to use this blog to answer this question as there are many things to consider before arriving at the correct answer for you.
Equally, I am a firm believer that you should never put the tax cart in front of the business horse. So never do something that may harm your business purely to avoid paying tax.
However, if you believe that the money raised by your campaign will push you over the VAT threshold or if the money that you raise will push you into the higher rate tax band (if self-employed) then it may be worth considering the more traditional fundraising methods to compare costs. As loans are not business income or VATable.