Why VAT Treatment Crowdfunding Matters
Crowdfunding has exploded in the UK. Since 2013, it jumped from under £30 million to over £550 million by 2020. But with that growth comes complexity. You need to grasp VAT treatment crowdfunding if you’re planning an SEIS or EIS equity raise. Get it wrong, and you could face unexpected VAT bills or miss out on tax relief. Get it right, and you keep more cash in the bank.
The Rise of SEIS and EIS
The Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS) are tax-incentivised programmes. They lure investors into early-stage ventures by offering income tax relief, capital gains relief and loss offsets. Equity crowdfunding platforms like Oriel IPO specialise in these schemes. They vet projects, ensure eligibility, and equip founders with the right paperwork.
But what about VAT? That’s where VAT treatment crowdfunding steps in. HMRC’s VAT Notice 701/41 and the VAT Finance Manual outline how to treat various crowdfunding models. In this guide, we’ll break it down. No jargon. Just clear, actionable steps.
1. Four Crowdfunding Models and VAT
VAT treatment crowdfunding depends on the model you choose. Here’s a quick rundown:
-
Donation-based Crowdfunding
– Backers give money with no return.
– HMRC treats this as gift income.
– No VAT if there’s no supply of goods or services. -
Rewards Crowdfunding
– Backers receive non-financial perks or advance goods.
– HMRC sees this as an advance payment.
– VAT applies if the reward is a vatable supply. -
Debt Crowdfunding (Peer-to-Peer Lending)
– An investor lends money at an agreed interest rate.
– Interest receipts fall under loan relationship rules.
– No direct VAT, but tax on interest income applies. -
Equity Crowdfunding
– Investors get shares in return for funds.
– No VAT on share issue.
– SEIS/EIS offers income tax and capital gains tax relief.
Each model carries unique VAT and tax rules. But our focus here is on equity crowdfunding under SEIS/EIS and how VAT treatment crowdfunding impacts your campaign.
2. VAT Treatment Crowdfunding: Key Principles
Before you launch, remember these VAT basics:
• Supply vs. Gift
If backers expect something in return, it’s a supply. VAT may apply.
• Time of Supply
When do you record income? HMRC rulings (eg. Lunar Missions Ltd) can shift VAT dates.
• VAT Threshold
The current UK threshold is £85,000. Below this, VAT registration is optional. Above it, you must register.
• Advance Payments
Rewards crowdfunding triggers VAT at the time of payment, not delivery.
Understanding these lets you plan your SEIS/EIS round without nasty surprises.
3. Tax Implications for SEIS and EIS Equity Crowdfunding
Equity crowdfunding is the go-to for startups seeking growth capital. Here’s how SEIS and EIS intertwine with VAT treatment crowdfunding:
SEIS Highlights
- Income Tax Relief: Up to 50% on investments (max £100,000 per tax year).
- Capital Gains Exemption: No CGT on SEIS shares held for at least three years.
- Loss Relief: Offset losses against income.
- VAT Impact:
- No VAT on share issuance.
- Rewards or perks outside share issue may be vatable.
EIS Highlights
- Income Tax Relief: 30% on investments (max £1 million per tax year).
- Capital Gains Deferral and Exemption: Defer gains or get CGT-free growth after three years.
- Inheritance Tax Relief: 100% after two years.
- VAT Impact:
- Similar to SEIS: share issues are VAT-exempt.
- Extras (events, merch) could attract VAT.
In both schemes, VAT treatment crowdfunding revolves around those “extras.” If you promise T-shirts, webinars, or invites to backers, you must check if that’s a vatable supply.
4. How Oriel IPO Simplifies VAT Treatment Crowdfunding
Navigating VAT and tax rules alone can feel like a maze. Oriel IPO offers a commission-free, subscription-based platform that bundles three core services:
- Curated, tax-efficient SEIS/EIS investment options.
- Educational resources, including guides, webinars, and checklists.
- A vetted process to confirm HMRC eligibility before you go live.
No more guessing if your T-shirts or VIP meet-and-greets will trigger VAT. Our educational guides explain HMRC Notice 701/41 in plain English. We show you:
• How to classify payments as gifts, supplies or advances.
• When to register for VAT and how to calculate thresholds.
• What records HMRC expects when you claim SEIS/EIS relief.
Plus, our subscription model means you keep every pound raised. No hidden commission on funds.
Explore our commission-free SEIS/EIS marketplace
5. Practical Steps: Preparing Your Campaign
Ready to launch? Follow this checklist to nail VAT treatment crowdfunding:
-
Define Your Crowdfunding Model
– Equity only, or add rewards?
– Understand if gifts vs. vatable supplies. -
Estimate VAT Threshold
– Track income from rewards.
– Consider time of supply for advance payments. -
Register (If Needed)
– Register for VAT before hitting £85k.
– Account for supply date, not delivery date. -
Prepare SEIS/EIS Documentation
– Form SEIS1/EIS1 approval from HMRC prior to offer.
– Issue compliance certificates post-raise. -
Keep Accurate Records
– Maintain invoices for rewards.
– Record investor details and share allocations. -
File Returns and Claim Relief
– VAT returns quarterly.
– Income tax returns to claim SEIS/EIS relief.
These steps minimise risk. And if you ever feel stuck, our support team at Oriel IPO is just a message away.
6. Pitfalls to Avoid
Even seasoned founders slip up. Watch out for:
• Misclassifying Donations
Label gifts as donations. But if backers expect goods, HMRC may demand VAT.
• Late VAT Registration
HMRC can levy penalties for late registration.
• Unclear Rewards
Vague perks leave room for HMRC disputes. Spell out what backers get.
• Missed Relief Windows
SEIS/EIS relief claims must happen within specific timeframes.
Spot these early and you’ll sail through your campaign.
7. Real-World Example
Imagine you run a food-tech startup. You raise £100,000 under SEIS. You offer:
- A limited-edition apron (£25 pledge).
- A cooking webinar (£50 pledge).
- Equity only (£1,000+ pledge).
VAT breakdown:
- Aprons: physical goods, 20% VAT if you’re registered.
- Webinars: digital supply, 20% VAT if over threshold.
- Shares: no VAT.
Without a clear VAT treatment crowdfunding plan, you’d understate VAT on aprons and webinars. That means unexpected VAT demands. With Oriel IPO’s guides, you classify these correctly, set aside VAT, and keep your SEIS tax relief smooth.
8. Key Takeaways
- VAT treatment crowdfunding is all about understanding supply vs. gift and time of supply.
- SEIS/EIS share issues are VAT-exempt, but extras may not be.
- Oriel IPO’s commission-free, tax-focused platform helps you navigate HMRC rules.
- Accurate record-keeping and timely registration protect you from penalties.
Ready to keep every penny of your raise and maximise tax relief?
