If you need money to kick start your new business or to inject some life into an existing one, crowdfunding is one option. But is it tax efficient?

Join the crowd

Crowdfunding has only been around for a relatively short time yet it’s become a popular way to raise money for start-ups, especially for businesses that aren’t mainstream. And while the government is keen on crowdfunding (which is always helpful), generally speaking it has not introduced any special tax rules to accommodate it.

Crowdfunding options

Broadly speaking, crowdfunding takes four different forms:

  • donations where nothing is given in return
  • donations where something is given in return
  • loans, interest free or not
  • money in exchange for shares, etc.
  • Something for nothing
  • The first situation is the most tricky. It typically crops up with local businesses where there’s a community interest. For example, say the village pub is about to close permanently, some of the locals start a campaign which raises enough donations to attract a new landlord. Many tax experts take the view that this type of gift would be taxable on the new landlord as income.

    Tip. We don’t think the position is so clear cut. If there’s no trading relationship between the donor and the recipient we think a reasonable case can be made for it to be treated as not taxable. In this situation it’s advisable to ask for clearance from HMRC.

    Something in exchange

    In the second situation the position is more certain. Where your business gives the donor something in exchange for their money it will almost certainly be a taxable arrangement, unless what’s given is no more than publishing an acknowledgment. A real life example involved a wine shop which the owners wanted to add a wine bar to. It asked its customers to donate to the construction cost in exchange for discounts. This was clearly a trading arrangement and so taxable.

    Trap. VAT also applies where something other than a mere acknowledgment is given in return for money. That would mean, for example, that out of a £600 donation received you would have to account for £100 VAT to HMRC.

    Tip. If you receive donations before you need to be registered, you won’t have to account for any VAT.

    Loans and shares

    The good news is that where crowdfunding is in the form of a loan, or you offer shares in return, the money you receive isn’t taxable. Of course, the downside to these arrangements is that you either have to eventually repay the money or give the person who provided it a stake in your business.

    Choose the right type of crowdfunding

    If you’re only aiming to run a small local business with a community purpose, say a nursery, donations are a good way to go. However, if you need significant funds or the business is more commercial and you want to avoid paying tax on funding, go for a loan or share arrangement.

    This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.