Crowdfunding is a way of raising money by asking a large number of people each for a small amount of money. Although it’s a relatively new concept, it’s fast becoming one of the most popular ways to start up a business. At present, the government have yet to introduce any special tax rules to accommodate this way of getting your business off the ground.
Is money received through crowdfunding taxable as income?
Let’s firstly look at the different forms crowdfunding takes.
• Donations where nothing is given in return
• Donations where something is given in return
• A loan (interest or interest free)
• Money is exchanged for shares in the business
Each of these situations is different and can mean different things for your business.
Technically speaking, if you are receiving donations with nothing going back then the money is ‘gifted’ by various individuals. Many tax experts take the view that this type of gift would be taxable as income. However this may not be the case. If there isn’t a business relationship between the donor and the person starting the business then you could probably make a reasonable case that the money is not taxable. If you’re in this situation we would advise you contact HMRC and get clearance.
When you agree to give something in return of a donation, this is considered a taxable arrangement. In a situation like this, where there is a clear trading arrangement, the money you have been given to help start up your new venture is most definitely taxable. Be aware though, VAT also applies when there is a trading agreement. If you are looking for a tip, try and receive your donations before you need to be registered, then you won’t have to account for any VAT.
If the money is loaned or you agree to exchange it with shares in your company, then the money you receive will not be taxable. This is often considered a favourable option.
The trick is to choose the right kind of crowdfunding option to suit your business. If your new venture is only a small business aimed at involving the local community then donations are the best way to go. However if you are planning on starting a much larger, more commercial business & you wish to avoid paying tax, we would suggest going for a loan or a share agreement.