Tax treatment of crowdfunding
This article discusses the tax treatment of crowdfunding and the issues for both investors and the recipient.
What is crowdfunding?
Crowdfunding is a form of finance model where the general public are invited to contribute. This can be to either a project, or a business start-up. A reward is usually offered to incentivise the contributor which is based on the level of their investment.
There are several different variations of crowdfunding scheme. The tax treatment of crowdfunding will vary accordingly depending on the type of scheme involved. The person who provides the funds is known as the 'backer'. Whereas the recipient is known as 'the project'
Crowdfunding by donation
In this case the backer makes a contribution to the project with little or no expectation of receiving a return from the project. Therefore unless the project is a registered charity the backer receives no tax relief on their contribution.
If the project is a charity then it may be possible to claim tax relief under gift aid. However if a potential reward is offered to the backer (see above), tax relief might also be lost. Although this would depend on whether the donation is deemed to be tainted (see here).
Any contribution by the backer would also be treated as a potentially exempt transfer for inheritance tax purposes.
From the project's perspective there are two main tax issues to consider:
Crowdfunding by debt
Crowdfunding by debt is regarded as peer to peer lending. In the UK this is regulated by the Financial Conduct Authority. The tax treatment varies depending on whether the lender is an individual or a company.
If the lender is an individual then special rules apply for any interest payments - they fall in the remit of peer to peer leading. If the loan becomes irrecoverable then it may be possible to claim for a capital loss - see here.
Where the lender is a company then the tax treatment of any interest payments or loan write-off fall within the corporate loan relationship rules.
Crowdfunding with rewards
In this type of scheme the backer contributes in the expectation of receiving a reward. For example for a film this might be an exclusive invitation to the premiere. Any contribution in these circumstances is considered an advance payment for this reward. Some issues to be considered are as follows:
Crowdfunding with equity
Crowdfunding by equity is regulated by the FCA. The tax treatment of crowdfunding in this case means it may be possible to obtain relief under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme.
If the shares become worthless or a sold at a loss it may be possible to claim capital gains tax or income tax loss relief.
Crowdfunding - other issues
When there is a group of investors who pool their funds and a manager invests these on their behalf, this might create a Collective Investment Scheme. If not authorised or recognised by the FCA, it is regarded as an unregulated Collective Investment Scheme.
Unregulated Collective Investment Schemes are illegal in the UK and there can be heavy fines for creating these in the UK.
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