Management of investments, portfolios, funds, ‘wrapper’ products and related services: crowdfunding
Crowdfunding is the practice of funding a project or new business venture through a collection of small contributions from a large number of people (the crowd) over the internet.
The project owner (entrepreneur) will normally use an online platform which specialises in crowdfunding to market and advertise their project to the general public in the hope of generating interest and raising funds.
As crowdfunding is a new and developing area, this guidance is not definitive. There may be other supplies in relation to crowdfunding arrangements that are not covered in this guidance.
HMRC understands, there are two main crowdfunding models; the non-financial model and the financial return model.
1. The non-financial return model
The two main non-financial models are the reward model and the donation (no reward) model.
1.1 Reward model
The contributor, in return for providing a monetary contribution to the project or venture will receive goods or services (non-monetary reward).
Where a contributor receives goods or services that have an intrinsic value (e.g. clothing, tickets, dvd) in exchange for support given, there is a supply for VAT purposes. The VAT treatment will follow the liability of the goods or services provided.
1.2 Donation (no reward) model
The contributor makes a monetary contribution to the project or venture and expects nothing in return.
Where a contributor freely makes a contribution where they expect and receive nothing in return, the contribution is treated as a donation and is not liable to VAT. The position is the same where all that the funder receives is something of symbolic value. For example, an acknowledgement such as a mention in a programme or something similar.
2. The financial return model
The two main types of financial return model are investment based and loan based.
2.1 Crowdfunding - Investment based
In exchange for their investment, the contributor receives financial remuneration in the form of equity securities (such as shares) or debt securities (such as bonds or debentures) issued by the business who launched the funding campaign.
Following the decision of the ECJ in Kreztechnik, the issue of securities by the business to the contributor, will not be a supply for VAT purposes provided the purpose of the issue is to raise finance.
Where there is a sale, transfer of or trading in existing shares and this is done in furtherance of a course of business, then this is treated as exempt under item 6 Group 5 schedule 9 VATA 94.
Where the contributor has received financial remuneration in the form of shares issued by the business, any dividends paid to the contributor will be outside the scope of VAT.
Where the contributor has received financial remuneration in the form of a debt security such as a bond or debenture issued by the business, interest received by the contributor as holder of the security will be exempt under item 2 Group 5 schedule 9 VATA 94.
Where a fixed term debt security such as a bond is held to its maturity date the repayment received on redemption will be outside the scope of VAT.
For further information on the VAT treatment of securities see VATFIN4250.
2.2 Crowdfunding - loan based
Otherwise known as peer to peer lending, the contributor will lend money to a business/entrepreneur they select on the crowdfunding platform in return for interest payments and a repayment of capital over time.
The contributor is granting credit in the form of a loan and in return will receive interest. The value of the supply is the gross interest or other sum received but not the repayment of the loan itself. The interest received on the money loaned is consideration for an exempt supply of credit.
Crowdfunding platform services
Online crowdfunding platforms provide an opportunity for entrepreneurs to market or pitch their project to the general public. Some platforms are generalists and offer different types of projects and crowdfunding, others focus on specific types of project e.g. technology or focus on one type of crowdfunding e.g. an equity platform.
Crowdfunding platforms providers operate different fee structures for their services. Fees can include commission on funds raised, yearly or monthly subscription fees, flat fees, arrangement fees, administration fees and legal costs.
Some platforms are purely a landing page that brings entrepreneurs and funders/investors together. Others have a more active role and the platform provider acts as the central counterparty in the funding arrangement between the funder/investor and entrepreneur.
As there can be fundamental differences in the services provided by many crowdfunding platform providers, the VAT treatment will depend on the individual facts of the crowdfunding arrangement and the precise nature and characteristic of the platforms service.
If for example, the platform provider acts in an intermediary capacity between the project owner and the investors/contributors in arranging a financial transaction, the service will also be exempt if it falls within item 5 sch 9 VATA 94.
If however the platform provider is simply providing the technology for the project holder to advertise and market their project and is not involved in the funding arrangements between the project owner and the funder, the service will be taxable as it is purely technical in nature.