Crowdfunding has become an increasingly popular choice for raising investment funds over the last few years. According to research by Massolution, Crowdfunding increased by 167% throughout Europe in 2014 to over £10 billion, with more than a fifth of all investment raised in the UK coming from the various crowdfunding platforms.
The initial appeal was in opening up investment opportunities to family, friends and the general public that in the past have been typically reserved for a few, wealthy investors.
Small businesses and startups have found this alternative method for raising finance attractive, especially if they have been previously turned down for a loan by their bank. However there are a number of crowdfunding choices available, each with their own unique set of accounting and tax implications that are important considerations before signing up.
While each case is different and it’s important to consult with an expert on your own unique requirements, we’ve put together some general information that will help you navigate the various options available.
Charities, schools and universities often use this structure where the investor supports a specific project or cause they may feel passionate about. They essentially pledge money as a gift without expecting anything in return. More altruistic in nature the lender receives nothing but a warm fuzzy glow for helping a worthwhile cause.
Corporation tax will not apply in this instance if the recipient is a registered charity. Likewise a businesses that offers nothing in return for injections of capital, accepting them merely as donations will not have to pay VAT.
Equity-based crowdfunding is most commonly used by start-ups looking for a significant investment into their business. The investor will expect a return on their investment and is typically rewarded by receiving equity in the business.
In most cases, investors will want to receive tax benefits that requires a business to be eligible for the SEIS and EIS schemes.
To be considered for both SEIS and EIS, Investors must not receive anything of significant value from the company. There are no set rules around what’s classified as “significant” and interpretations may differ between an individual and the HMRC.
With regards to VAT, shares are considered exempt supply and there will be no requirements to charge VAT to investors.
Under reward based crowdfunding investors receive no financial return but are instead awarded a tangible “perk” in the form of an item or service as a thank you for their funds. In most cases, the reward will be the product that the entrepreneur is trying to launch. The big plus for the entrepreneur is that you don’t have to give away equity or repay the debt.
There is a requirement to apply VAT to these rewards goods, regardless if they’ve been given freely. Otherwise, crowdfunded businesses and their investors would gain an unfair tax advantage over the general public by effectively obtaining their reward goods and services free from VAT.
From a taxation perspective you will be liable to corporation tax if the investment contributes towards a commercial activity. A good rule of thumb to follow would be determine the amount you need for your project to succeed, before adding 20% to the amount you wish to raise. This should give you a reasonable margin when it comes to paying your corporation tax at the end of the financial year.
Loan based crowdfunding sometimes referred to as P2P lending has two common models:
The loan from an investor will not be paid back, but in return they will receive a percentage of sales for a given time period.
The investor receives a fixed interest payment for a given period that ultimately ends up with the loan being repaid in full.
Another feature is the possibility of utilising the social investment tax relief (SITR). The scheme is available on a loan to a social enterprise that provides a range of income and capital gains tax reliefs, providing that you both investor and company meet the necessary conditions.