As most readers will be aware, CrowdBnk is unique in that a number of our projects offer investors a mix of both equity and rewards. Most people are conscious of tax when it comes to pure equity crowdfunding (you can read our post on SEIS/EIS relief here), but few realise that projects which include an equity investment and a reward may have additional tax implications (both good and bad).
We therefore thought it would be useful to highlight some of the tax issues that you should be aware of before crowdfunding. We’re obviously not tax experts (nor do we want to be), so what follows doesn’t constitute tax advice and we recommend that you always seek independent tax advice if you are ever unsure about your potential tax exposure.
Something that we all encounter every day, VAT, is often the most over-looked area of the tax code when it comes to crowdfunding. For VAT purposes, if a reward forms part of the trading stock of a business (e.g. an art gallery offering a free painting), then a deemed supply will take place and tax must be accounted for. There is, however, an exception within the tax code where the cost of the reward (not its market value) does not exceed £50. Under this scenario, an input is created that allows the VAT on the cost of the gift to be offset.
If the rewards being offered by a company form part of the trading stock of its business (e.g. the painting example above), there is the possibility that a corporate tax liability may be created. In this scenario, the market value of the gift may be treated as a trading receipt and improve turnover thus increasing the amount of profit subject to corporate tax.
Tax deductions are important for almost every business, and rewards given in connection with an equity project potentially offer crowdfunding companies the opportunity to take advantage of such tax relief. For example, a deduction can be claimed in a given accounting period for the cost of each reward that does not exceed £50, provided the reward has some form of conspicuous advertising displayed on it. To claim such a deduction, however, the reward cannot be in the form of food, drink or tobacco.
Finally, one of the significant appeals of crowdfunding is the opportunity for investors to take advantage of the government’s EIS/SEIS tax programs. However, an important element required to qualify for the tax relief is that an investor must not receive anything of value in return for the investment (other than the underlying shares). As with many tax-related issues, what qualifies as an object of value is murky. Current tax legislation exempts any reward or gift which is of “insignificant” value to the investor excluding shares. What constitutes “insignificant”, however, is less clear but in the majority of cases rewards valued at less than £1,000 should qualify for the exemption.
It goes without saying, but we are not tax experts and nothing included in this blog post should be taken as tax advice of any kind. We recommend that you consult with your tax adviser on these issues or, if you don’t have one yet, ask us and we will be happy to introduce you to one of our trusted suppliers.