Crowdfunding and VAT

The trendy way to get your investment capital these days is to put together a slick video and shove your concept on Indiegogo or Kickstarter. You offer some gifts/rewards for different pledge levels and set an overall funding target and then sit back as everyone talks about it and does your advertising for you for free. Awesome stuff. It has been used for different types of project, often for bringing a bit of hardware from a prototype into production, and the pledge often includes one of the products – but there is an element of risk to it, some are delayed like the Parallela (which we funded, still waiting for our two boards) and some like The Doom That Came To Atlantic City and Clang appear to take a lot of money and deliver nothing. Some don’t meet the funding target, the most spectacular example of this was the Ubuntu Edge which managed to break the records for the most money pledged and the biggest shortfall at the same time, which is quite a clever trick. I was contemplating backing the Edge, but I certainly didn’t want to put it on my personal credit card, I wanted to put it through as a company expense – it would have been an interesting toy for us to play with. Libertus is a VAT registered company, this means we charge VAT on things we sell to our customers, and we reclaim VAT on stuff we purchase from suppliers – it is a “Value Added” tax not a sales tax. We pay tax on the value we add to the goods in the supply chain. This makes a lot of sense in a products business where you buy raw materials, do some process to them, and sell finished goods, but it also works just fine when we sell services and buy assorted bits and pieces that are not strictly raw materials. The upshot of this is that as a VAT registered business, when we buy pretty much anything, we can reclaim the 20% VAT that our supplier added in the price. So, back to crowdfunding, I asked Canonical if I would get a VAT receipt for the £430 or so that it would cost me for the phone, so I could reclaim the £71.66 VAT (or offset it against my VAT on sales, you don’t actually get money back from HMRC unless something is going very wrong in your business). The answer was no, they don’t issue VAT receipts, which kind of makes sense, sort of. It isn’t a product purchase, it isn’t an investment (there are lots of rules about what an “investment” is, and this isn’t one) it is basically an at-risk donation. So I can’t reclaim VAT on it. On the other side, is it a sale? Does the supplier have to remit VAT to their tax authority on the sale. Well, probably. You can’t just wriggle out of VAT by trading exclusively on a crowdfunding basis. Tax fiddles don’t work, they can look at the substance of what is happening even if the details are a bit dubious. If it walks like a sale, and it quacks like a sale then the tax authorities will want their slice of the party.

The other twist to this is that the major crowdfunding platforms are based outside Europe, Kickstarter is in New York,  Indiegogo in San Francisco. The USA has state level sales taxes, and no VAT. The platforms are a party to the sale, you pay your money into their account, it is held in escrow for a bit, then released to the project with a percentage fee deduction. How does this affect the sale, am I purchasing the gift from the USA? Is there import duty now? Does this exempt it from VAT in some way or not?

This week our friends at OpenERP have launched their own crowdfunding campaign for a retail Point of Sale solution, based on our favourite little computer – the Raspberry Pi, and some other bits of hardware.

OpenERP Point of Sale

This is a cool project, I have been wanting to put together all these bits for some time, I bought a receipt printer and barcode scanner for development/demo purposes, but I don’t have a cash register and I have not had time to write the ESC/POS driver for the printer. This project will do the driver for the receipts properly and it assembles a set of reference hardware that can be reliably supported by OpenERP, which means we can help open up the retail sector to Free Software from the point of sale through to manufacturing, logistics, accounting and everything else. In short, this is great, I want it and it is a totally legitimate business expense for us – but I would really like to know how we account for the VAT element. Normally for a purchase from Belgium we would do reverse charge VAT, we notionally add 20% to it, then reclaim that back again, so there isn’t much net impact, but I have no idea if I need to do that on a crowdfunding pledge. Do comment if you have any thoughts on the matter!

6 Comments

  • Martyn says:

    Alan

    I’d say that crowdfunding is outside the scope of VAT as it is not a ‘supply’ as such – it is finance costs… and the ‘banksters’ got anything to do with their industry exempted years ago (think interest, finance and bank charges… no VAT there!!!). Although I would check with an expert…. this opinion can’t be taken as advice yada, yada

    You hit the nail on the head, though – VAT is complicated. VAT is, in economics terms, the worst tax there is – deadweight costs and ability to avoid are the main other reasons. Oh, and its mandated by the EU and was invented by a Frenchman ;-D – so there you have it in a nutshell – many reasons to think its bad tax indeed.

    Martyn

    • Alan Bell says:

      With the rewards clearly containing products it kind of blurs from unregulated financial services (what used to be called funds raised by public subscription and used for monuments and buildings) into pre-orders and that would be seen as a taxable supply of goods, at some point some part of it is going to be tax relevant. I have a feeling that it is probably the worst way to sell something B2B, the supplier has to charge and remit tax, the customer can’t reclaim it as input tax, HMRC get an unnecessary chunk of cash that could have been avoided if it was a straightforward sale and purchase. I didn’t know VAT was invented by a Frenchman, maybe that changes everything :)

      • Martyn says:

        Alan

        My view, FWIW, is that VAT has so many ‘issues’ and deadweight costs its the worst way for the govt to raise revenue (apart from the fact its a stealth tax). They should just dump it – would save the ‘is a jaffa cake a cake or a biscuit’ nonsense and all the angst it causes businesses. Same with employers NI. Just roll it into some form of Land Value Tax and be done with it.

        Re the crowdfunding issue – if VAT didn’t exist the problem would just go away. Another example of VATs deadweight costs – it increases complexity and, at the margin, discourages business activity. In a non-VAT world the receipt would just be treated as income and taxed accordingly, and the payment as a business expense or an ‘investment’ (in the same way as stock is an investment, if you like) depending on how the payer decided to treat it in their accounts.

  • Andy says:

    I had some success with Linux Voice: they immediately agreed that the £35 digital subscription payment to Indiegogo was a supply of ebooks from Linux Voice Ltd thus attracting VAT at standard rate, and have supplied me with a VAT receipt.

    In my view that is the correct treatment for crowdfunding that reaches its goal. I’m still torn over what would be correct for campaigns that don’t reach their goal.

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