By Nicholas Hallam, CEO of Accordance, International VAT consultancy & compliance services
Companies today are realising that the methods of funding expansion and growth are changing. While the traditional route would be to approach your bank manager and ask for a loan there are now a myriad of different options available.
One of the most popular options is crowdfunding, which involves obtaining many small investments from members of the public (as opposed to one large amount from a single institution).
Those businesses which attempt to crowdfund typically approach it in three different ways. Firstly, in return for a monetary payment they will give investors a stake in the business. Secondly, instead of a stake they will give investors a good, stock or benefit from the business – maybe an on-going discount card or some items for free. Finally, it might sometimes be necessary to let investors have an element of both, so they get a stake and some tangible goods as well.
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Whilst this flexibility in what can be offered is, in theory, exactly what a growing business requires, there are complex VAT implications which need to be given serious consideration, if the benefits of crowdfunding aren’t to be cancelled out by a surprise tax hit..
If the wrong VAT treatment is applied when the scheme is set up, it could lead to the business suffering significant penalties and interest from the taxman. Aside from the direct effect on the business, this won’t please investors – and is likely to have negative consequences when future funding is sought. And, in the longer term, it may also create a negative brand image, something which is very possible in the current climate where tax scandals are dominating the headlines. Many crowdfunded businesses are positioned as alternatives to the huge corporate behemoths; they need to be seen to be responsible.
The problems VAT throws up for a crowdfunding business are relatively technical but we have attempted to clarify the principles here.
In our view, the first issue to consider is whether the business is even registered for VAT. If it is not then the value of contributions must be monitored because if they are subject to VAT then passing the registration threshold (in the UK currently £82k) will trigger a liability to be registered. If the business doesn’t recognise these “contributions” as income though then there is a good chance of the registration being overlooked. This could then lead to penalties for not registering at the right time.
Once a VAT registered business takes part in crowdfunding then the questions begin on how VAT applies to those contributions. And this is a tricky question to answer because as it stands, the UK Government hasn’t published any guidance on the matter. The only existing guidance has been published by the European Commission’s VAT Committee. So for the time being this must be relied upon (unless you are a Greek business, in which case your tax authority, alone in the EU, has published guidance).
Despite it being the only available source of information, the EU’s guidance is sensible and in our view provides some practical steerage for businesses. So, as a start it can be said that if a good is supplied in return for the contribution then that good will probably be subject to VAT. If equity is supplied (i.e. shares in the business) then the contribution won’t be subject to VAT. If both items are supplied, the contribution needs to be split between the two and some of it will be subject to VAT, some not.
This sounds simple enough but it’s the consequences of accounting for the VAT which will be difficult for businesses to manage. For example, the equity linked contributions will not be subject to VAT but any costs also directly linked to the issue of the shares could be blocked from recovery. This would increase the business’s costs.
These costs would not occur though if goods subject to VAT were issued, because VAT on costs linked to these would be recoverable. The challenge for the business though would be making sure that it could account for VAT on the contributions it receives. For example, if it had received £120k but that was all subject to VAT then £20k would need to be paid to HMRC. Straight away, the funding is reduced by 16.6%.
As can be seen, it’s a complex and difficult area to manage, even from a UK-centric perspective! The broad principles about the treatment of crowdfunding in the EU can be found here: http://ec.europa.eu/finance/general-policy/docs/crowdfunding/20150930-crowdfunding-study_en.pdf. Whether it becomes even harder to handle depends on how the tax authorities of different EU member states end up interpreting crowdfunding VAT rules. The great benefit of crowdfunding is that, because of the internet, it allows companies to reach millions of potential investors outside their immediate environment. But if the regulations are implemented in different ways in different countries, that benefit could itself become a problem.
Nevertheless, businesses must aim to get VAT on crowdfunding right. Not doing so might tee up problems from the outset of a new venture – never a good way to start. Although there is only guidance from the EU at present, its hoped that the UK will publish some soon and when this happens, businesses will be able to take more comfort in the decisions they make. Until then though caution should be the watchword and advice taken to ensure that an exciting new opportunity is not compromised by a failure of compliance.