"EU confirms VAT on crowdfunding" Topic

The EU's VAT Committee has published its new review of the liability to VAT of crowdfunding activities, which included confirmation that VAT is due on reward-based crowdfunding projects.

While not binding on EU member states, the conclusions of the Committee are highly influential, and are typically followed by national tax authorities.

The EC referred the VAT issue to the Committee in April. It was particularly concerned with the highly popular practice of ‘rewards crowdfunding' where the public can contribute funds in return for products or services, still to be developed by the fundraiser. Recent rewards projects have included software development, films and a range of consumer products that are offered free or at a significant discount to crowdfunding investors.

The key conclusions of the VAT Committee were:

* Goods or services promised to investors in exchange for their funds in crowdfunding campaigns are liable to VAT as a taxable transaction
* VAT due on funding will be payable to the tax authorities when the cash is received
* Where investors receive shares, bonds or debt in the campaign, there is no VAT due – although a participation in future profits from intellectual property rights will be subject to VAT
* The services of crowdfunding platforms that provide fundraising services to entrepreneurs are within the scope of VAT

The VAT Committee's conclusion may spring a tax liability on unprepared crowdfunding projects and make the economics far less attractive. Many projects will now have to register for VAT to process and report the liabilities.

Source

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | eBay | Twitter

Interesting.

I suspect a good portion of this business will move overseas, when possible.

I suspect a good portion of this business will move overseas, when possible.

The tax people will always get to the money when it enters the EU no matter where it's raised. :-(

To be fair it's not really news just confirmation. I already know of UK crowd funding projects that have been caught by the VAT man.

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | eBay | Twitter

Losses, times waste and ocean of papers. The known way to kill a good idea.
Nothing must escape the leviathan.

And what impact would that have on Kickstarter as they are benefit Corporation?.

As much as I don't like paying extra it seems pretty logical and right that if you pay someone money and get goods back that would normally incur VAT of bought in the usual way than VAT should be payable. Seems the correct findings to me.

Yep, much as nobody likes the VAT man, the fiction that you're "investing" rather than "buying stuff" doesn't justify a different treatment from regular sellers. It certainly isn't a welcome development, but it is an entirely reasonable one….

And what impact would that have on Kickstarter as they are benefit Corporation?

Their fees would probably go up 20% for EU projects.

* The services of crowdfunding platforms that provide fundraising services to entrepreneurs are within the scope of VAT

They may try to avoid EU VAT altogether but they are too big a target to try that (all non-EU business operating in the EU have been required to levy and pay VAT since 2010).

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | eBay | Twitter

Imagine the uber successful project that takes the business by surprise and pushes them over the VAT threshold.

One sixth of their gross income from the project is due immediately to the HMRC. Then they pay Kickstarter or whoever their fees.

If they haven't costed in the VAT and the margins are tight the project could become loss making. Plus VAT would be due on any postage charged.

All this while the business must re-price to account for the VAT they must now levy (and pay) on their regular sales.

Chaos awaits the unprepared!

The only up side I can see is that the business can reclaim VAT on goods and services purchased in the six months preceding their VAT registration.

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | eBay | Twitter

Unless their inputs are zero-rated (rare) it shouldn't turn a profitable KS into a loss-maker – obviously it can happen, but unless a large chunk of your input cost is wages rather than purchases (very rare for a KS) it's unlikely to be an issue. Campaigns that mix books with other items in a reward might have problems though – that's the obvious pitfall in our sector at least.

Chaos has *always* awaited the unprepared on KS though, and an unexpected VAT registration will certainly magnify that – the middle of an oversubscribed KS campaign is, umm, not the ideal time to take on that administrative burden….

Hopefully they'll do a bit more to push a "that's enough, thanks" approach now though – the potential for VAT registration to loom is one more reason to close a successful KS early rather than let it become a leviathan….

Thanks for finding this, Martin – I'm raising it in the EU VAT Group and will publicise it on Twitter as well as FB.

Henry
MWBG

If they're taxing it like a purchase, not an investment does this change a Kickstarter's liability for not delivering? Does it strip away the excuse that it wasn't a preorder, but an investment in a company with a risk of loss? What about the laws on refunds?

If they're taxing it like a purchase, not an investment does this change a Kickstarter's liability for not delivering?

Sadly, failure to deliver is a civil matter and this isn't automatically linked to the tax status. It should be for consistency but I suspect it would have to be proven in court first.

Does it strip away the excuse that it wasn't a preorder, but an investment in a company with a risk of loss?

Yes as far as the HMRC is concerned for the purposes of collecting VAT.

What about the laws on refunds?

I refer my friend to my first answer. :-)

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | eBay | Twitter

Anyone interested in the UK tax status of crowd funding should read this article – bit.ly/1PzUEXN

They also point out that if you don't incur the major project costs in the same tax year as you receive your funding you will make an accounting profit for that year and will be liable to standard income or corporation tax on that sum. Ouch!

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Martin Stephenson
Vexillia: Wargames Miniatures & Accessories
Shop | Rules | eBay | Twitter

Would foreign investment be liable? As I might be liable for those goods revived in my home country via customs, would I have the issue of paying Vattax twice?
Great way to kill the entrepreneurial spirit, you go Taxman! ;x

Yep, EU tax madness is killing small business all over Europe, mainly by the associated costs of compliance – accountants fees, legal fees, registration fees and the like.

Particularly with one person businesses selling e-books, there is no minimum threshold, the first euro in business on line makes you liable for the full VAT regime. Amazon and the like don't really care about the effect on their balance sheet, the cost is a pin prick, and it actually benefits them as it clubs small business out of the market place.

Zargon – there are circumstances in which foreign campaigns can be liable (although enforcing that is a largely theoretical exercise if they have no EU footprint as it were) but there's no double taxation – physical goods are taxed on import into the EU, it's intangibles (software etc.) that can get complicated, precisely because there's no physical import.

An interesting development I wonder if company's like mantic have managed to get away from the vat using this method.

But its funny that they are going after small ventures when they can't get the likes of Starbucks, Amazon & eBay to pay the correct vat & taxes.

It's not funny; just common sense. The taxman – like any predator – will attack the 'soft' target that will be unlikely/unable to fight back.

Huge firms like Starbucks, Amazon et al. can afford the expensive lawyers who can outwit those of the tax collectors, or simply promise them such a lengthy, costly fight through the courts that they don't think it's worth trying.

Complex laws and regulations that require the services of expensive accountants and lawyers put poor, ordinary people at a disadvantage compared to the rich. 'Twas ever thus…