Jia Xie, associate at Lewis Silkin, considers the EU VAT Committee’s recently published guidelines on the VAT treatment of crowdfunding. For entrepreneurs who are considering crowdfunding, especially those adopting the reward-based model, it is likely to be subject to VAT. The activities of crowdfunding platforms supplying services to entrepreneurs fall within the scope of VAT and must be taxed unless what is provided consists of exempted financial services.
EU VAT Committee guidelines on crowdfunding, LNB News 16/11/2015 86
The European Commission’s VAT Committee has added a section on the VAT treatment of crowdfunding to its list of guidelines on various provisions of the VAT Directive 2006/112/EC. These guidelines are of an advisory nature only and do not constitute an official interpretation of EU law.
What is the background to these new guidelines?
The global crowdfunding market has grown substantially over the past few years despite having only been around for a decade or so. At European level, it is estimated that the crowdfunding activity during 2014 was worth close to €3bn.
Crowdfunding is seen as a popular alternative financing tool for start-ups and small businesses, especially in the technology and media sectors. The funding process involves the ‘entrepreneur’, the recipient of funds who creates a project and the ‘contributors’, those who provide funding to that project. Often it will also involve an online funding platform that usually charges a fixed amount of the funds raised.
Perhaps one of the factors contributing to the rapid growth of crowdfunding is the lack of a regulatory framework. Among the issues, the VAT implications of crowdfunding seem to have been ‘overlooked’ for some time.
What do the Committee’s guidelines cover?
The EU’s VAT Committee published its guidelines on the VAT treatment of crowdfunding earlier this month. While the Committee’s guidelines are not officially binding on Member States, they are generally followed by the relevant tax authorities.
The VAT Committee considers that the VAT treatment of crowdfunding depends on its return model, which is divided broadly into four categories:
Contributors make contributions without given anything in return. VAT issues are unlikely to arise given the characteristics of the model. VAT is only applicable to a supply of goods or services.
Contributors receive goods or services in exchange for their contributions to the funding of projects, for instance, a copy of the CD that the entrepreneur aims to produce, or an opportunity to participate in a film as an extra. The Committee considers that this constitutes a taxable transaction for VAT purposes:
‘provided that there is a direct link between the supply of goods or services and its corresponding consideration, and that the entrepreneur is a taxable person acting as such’.
In a crowdfunding situation, typically the contribution is made before any goods or services are supplied in exchange. The Committee regards this as:
‘a payment made on account of those goods or services on which VAT becomes chargeable upon receipt of the payment, provided that the goods or services to be supplied are precisely identified when the payment on account is made’.
The VAT treatment of transactions where goods or services supplied by the entrepreneur to the contributor are of symbolic value is less clear cut. These will need to be assessed on a case-by-case basis. Crowdfunding may be equivalent to a VAT-free donation but only in cases where the benefit received by the contributor is ‘negligible’, ie close to nothing, or ‘totally unrelated to the amount of the contribution’, for example, where the reward is identical irrespective of the amount contributed. The Committee gave the example of a sticker handed out for donations as being negligible.
Where the benefit received by the contributor consists of ‘goods forming part of the business assets of the entrepreneur other than goods applied for business use as samples or as gifts of small value, or of services that the entrepreneur carries out, the application of those goods or the carrying out of those services is subject to VAT’.
Where the financial reward received by the contributor from the entrepreneur takes the form of participation in future profits of the project in the form of securities such as shares and bonds, the Committee’s view is that the supply may be exempt, depending on the type of security. However, if the contributor’s participation relates to the ownership of intellectual property rights, the Committee’s view is that the supply may be a taxable transaction falling within the scope of VAT.
Where the financial reward received by the contributor from the entrepreneur takes the form of interest on loans, insofar as the contributor is a taxable person, the granting of credit to the entrepreneur is a taxable transaction exempt from VAT.
What do the guidelines say about the crowdfunding platforms themselves?
The platforms themselves also need to consider their position when charging fees. The Committee’s view is that, for VAT purposes, the activity of crowdfunding platforms supplying services to entrepreneurs falls within the scope of VAT and must be taxed unless what is provided consists of exempted financial services.
What are the practical implications of these new guidelines?
In the UK, no guidelines have been issued by HMRC on the VAT treatment of crowdfunding, but the VAT Committee’s guidelines on this subject should give a clear steer of HMRC’s likely view. It should be stressed that the VAT Committee’s guidelines on crowdfunding do not impose anything new on the regulatory framework. They are simply a view at European level regarding how current laws apply to these crowdfunding methods. They won’t come as a surprise to most.
For entrepreneurs who are considering crowdfunding, especially those adopting the reward-based model, it is likely to be subject to VAT; therefore the businesses should consider whether they need to register for VAT. No doubt it will add to the administrative burden of new businesses with VAT reporting obligations. On the flip side, it allows VAT-registered businesses to reclaim any input VAT they have paid on business-related goods or services.
For crowdfunding platforms, this might be a good opportunity to review their terms and conditions and carry out VAT compliance checks if they have not done so. At the moment, whether the crowdfunding market, especially the reward-based model, will remain an attractive financing tool, despite the likely VAT impact on the funds raised, is unknown.
Jia Xie is an associate at Lewis Silkin who advises businesses on a range of tax and share plan matters with a particular focus on corporate transaction structuring, negotiation of tax provisions and executive incentive plans. She also advises employers on a wide range of UK and international employment tax matters. She is a member of Association of Tax Technicians.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.