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Crowdfunding rewards to come under increased VAT scrutiny, says expert

The European Commission is expected to begin exercising greater scrutiny over the crowdfunding sector, presenting a risk to any businesses which have failed to account for VAT on the crowdfunding rewards they have provided, an expert has said.14 May 2015

VAT expert Rhys Pippard of Pinsent Masons, the law firm behind Out-Law.com, said that the European Commission's recent report into the VAT treatment of crowdfunding arrangements, while not seeking to impose anything new, has raised awareness of an area where some businesses may have been gaining an unfair VAT advantage over their competitors for some time.

Pippard's comments come after the Financial Times reported that the Commission is seeking to impose VAT on rewards provided to investors by businesses which raise finance through crowdfunding platforms.

Reward-based crowdfunding is one type of crowdfunding model which businesses, particularly SMEs, are increasingly exploring as they seek alternative sources of capital. Under the arrangements, the business generally offer tangible rewards to those that elect to provide funds to their company, rather than the more traditional model of shares.

Rewards can range from token gifts to prototype products that the business raising finance develops using the money raised from the crowdfunding exercise. Rewards may also be intangible, for example where a small film production company offers people the chance to appear as extras in their movie in return for finance.

"The Commission's plans do not present any new taxation on crowdfunding," Pippard said. "This is simply the Commission shining light into a relatively unexplored area, where some businesses may have not yet fully considered the tax implications of what they are doing."

"The requirement for taxpayers to apply VAT to supplies of rewards goods and services - whether given freely or by way of barter - has existed under EU law for decades. Otherwise, crowdfunded businesses and their investors would gain an unfair tax advantage over the general public by effectively obtaining their reward goods and services VAT-free," Pippard said.

The Commission's working paper on the VAT treatment of crowdfunding (19-page / 510KB PDF) published earlier this year, found that the goods or services which businesses supply in return for reward-based crowdfunding would generally "constitute a supply of goods or services " and that those supplies "should be treated in the same way as any other supplies for VAT purposes".

In the paper, the Commission distinguished reward-based crowdfunding from other types of crowdfunding activities. It said that businesses that offer nothing in return for injections of capital and accept them merely as donations do not have to pay VAT. The paper also confirmed that equity-based crowdfunding, where businesses offer financiers a stake in their business in return for investment, should remain exempt from VAT.

The research it commissioned into crowdfunding generally supports the views it expressed in its working paper. The 'crowdfunding innovative ventures in Europe' report recognised that reward-based crowdfunding is subject to VAT under certain circumstances, as has always been the case with comparable supplies of rewards goods and services.

The report said: "The contributions made by campaign backers in a reward or pre-selling crowdfunding campaign may be seen as advanced payments in exchange for goods or services, taxable under VAT regulations. If it is considered that an economic activity is being carried out, the campaign owner pledging for money may be regarded as a taxable person, even in the case of an individual."

Corporate law specialist in the technology sector Thilo Schneider of Pinsent Masons said that the enforcement of the existing VAT rules against businesses adopting the reward-based crowdfunding model could have an impact on the market.

"If in practice businesses engaging with the reward-based crowdfunding model have not been complying with the VAT rules then enforcement of the requirements in the market could make it more burdensome and costly for businesses to turn to alternative finance models of this kind," Schneider said.

According to a study undertaken by the University of Cambridge and EY, the alternative finance market in the UK was valued at €2.34 billion last year. The European market in total was valued at €2.96bn in 2014, up from €1.21bn in 2013. The value of the reward-based crowdfunding market across the UK and the rest of Europe in 2014 was more than €150m alone, according to the report. The equivalent market in 2012 was worth just €30m.

VAT specialist Darren Mellor-Clark of Pinsent Masons said that there is a case for the Commission to take "a permissive approach" to the issue of VAT treatment in rewards-based crowdfunding, in order to encourage economic growth.

"There is some precedent for this in the UK, as HM Revenue & Customs has previously demonstrated a less formal approach to exotic and innovative financial structures, such as Islamic finance products and Bitcoin," Mellor-Clark said.