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Crowdfunding entrepreneurs urged to be wary of tax implications

People using crowdfunding to invest in property should be wary of the tax consequences of raising money through this increasingly popular platform, according to London chartered accountants Blick Rothenberg LLP. 

With credit an increasingly scarce and expensive commodity following the financial crash, a growing number of individuals seeking investment funding have opted to turn to the public, in the form of crowdfunding, with a view to investing in property, among other ventures. But as a relatively new phenomenon, the UK tax legislation has not yet caught up with crowdfunding as a concept and the process involved can have “surprising outcomes”, warns Robert Pullen, personal tax manager at Blick Rothenberg. 

He commented: “An individual who receives funding through crowdfunding platforms would be forgiven for thinking that the funding is tax-free – after all, there is no guarantee of a return for those who are pledging their money and they are not taking a stake in the project.

“However, where the project is a business proposal, for example, in order to manufacture phone cases [to take an example of a project that is currently available to pledge money to] the receipt of pledge money is treated for UK tax purposes as income, taxable on the project creator after deducting allowable business expenses including the platform’s cut, at up to 47% for an individual or 20% for a company. As the pledge money is only released if the set funding target is met, the tax point is the receipt of the funds.”
 
Not only that, but because pledge money is treated as income, or more specifically, turnover, VAT may be payable on the amount received, if the project creator is a business and the turnover exceeds the VAT registration limit, currently £83,000.

Pulled explained: “The consideration for VAT purposes is not as simple as taking the total pledge money, especially if the rewards being offered are only of token value.  If the rewards are specified and can be valued then it might be possible to ensure that VAT was only payable on their value with the balance treated as outside the scope funding.
 
“However, if you only qualify for a particular reward if you pledged a certain amount then VAT could be due on the full amount even if the reward is of a much lower value than the money pledged.”

He added: “Projects launched on crowdfunding platforms typically have a set funding target but no upper maximum, and a modest target of say £6,000 can quickly generate upwards of £100,000 if it is popular. Individuals seeking funding through crowdfunding platforms must therefore be careful and keep in mind the tax consequences of a successful pitch.”

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