Rewards-based Crowd Funding – Why Start-ups need to understand the VAT aspect

11th August 2015

There’s no shortage of survey commentary in the business pages through the year to evidence how small businesses fear the complexities of the VAT legislation. A recent commentary from a Direct Line for Business commissioned survey suggested that around one in ten respondents had limited sales to ensure they remained below the VAT registration threshold.

Continuing pressures on accessing funding for small and medium sized business has seemingly added a further complication – with the growth in Crowd Funding as a route to raise monies to finance a business idea, creation or production.

For the vast majority of crowd funding projects where a share in the equity is the supply for the consideration of funding provided then nothing significant has changed from the VAT perspective. The challenge is in the area of “reward-based” crowd funding where in return for the finance provided the business enters into a promise to deliver some tangible benefit to the funder – some goods to be generated by the business in the future, a discount or voucher package perhaps?

In a sense this is nothing new from the VAT perspective – VAT is all about recognising whether you have made a supply of goods or services in exchange for a “consideration”. The issue with “reward-based” funding is the fact that you are giving a tangible benefit back having received the monies. It’s not a concern where the funder takes an equity share but is a concern where other tangible goods and services are supplied by the business concerned, would be seen as taxable business supplies for VAT purposes – future beer produced from a micro-brewery or digital services from an “app” developer for example.

So the challenge is not to confuse the phrase “funding” with the actuality of a “payment in advance” for supplies of goods or services that you may give to the person from whom you are receiving the monies. Such activities will count towards the need to consider your VAT registration position even before you may have started to “trade”.

Liz Maher: Director Centurion VAT Specialists Ltd

© Centurion VAT Specialists Ltd

Twitter: @centuriononvat

Centurion was founded in 1998 and since then it has grown to include five senior level VAT practitioners who have expertise in all sectors including education, third sector, housing associations and manufacturing. The team was awarded the Taxation Best VAT UK VAT Team in 2013.

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