Crowdfunding my business: Do I need to pay tax?

What is Crowdfunding?

Crowdfunding is a means of raising capital through the collective efforts of friends, family, potential customers and individual investors. It uses online platforms to pool investments – generally very small – from a large number of people to reach a goal.

Crowdfunding has become an incredibly popular method of funding new businesses. It is accessible, enabling entrepreneurs to reach a wide audience of potential investors. It offers validation through public interest and acts as a dual-purpose tool for both fundraising and marketing to a potential audience.

Different businesses have different needs, and crowdfunding offers flexibility with the various models (such as donation, reward, equity, and debt) that entrepreneurs can choose. It also gives you the opportunity to build a community of supporters who are genuinely interested in your plans and invested in your success.

However, there are certain financial aspects of crowdfunding that you need to bear in mind.

Tax Implications of Crowdfunding

Do you pay tax on crowdfunding? The answer is generally “yes.” The tax implications must be considered from two angles: the business raising money and the person investing in the business.

If you receive funds via crowdfunding, it is likely that this will be seen as taxable income. However, if the money is received as a loan which requires repayment, the interest on your repayments can be treated as an allowable expense.

Buying shares may also require you to pay Capital Gains Tax if the share value has risen when you sell. If dividends are paid, then dividend tax is another consideration to bear in mind.

Different Types of Crowdfunding and Their Tax Treatment

Crowdfunding can be approached in three ways- each with different tax implications.

Gifting crowdfunding involves requesting donations. These could be donations towards a charitable cause or perhaps a business requiring capital to get off the ground or launch a new product. For a business, this type of crowdfunding would be classed as income and taxed in the same way as any other income.

Loan crowdfunding involves a business asking investors to loan them money for a specified purpose. This form of crowdfunding requires you to pay back a proportion of this money each month, along with interest, and the crowdfunding platform will distribute this amongst the investors. As a loan, you will not be required to pay tax on the money you receive – but you can claim your interest payments as an allowable expense.

Equity crowdfunding sees crowdfunding platform users buying shares in your company. You may decide to offer dividend payments too, in addition to the shares themselves. If you do go down this route, remember that your investors may be liable for Capital Gains Tax or dividend tax on any shares that they buy.

Crowdfunding Incentives and Tax

It is not just businesses that may pay tax on crowdfunding campaigns; rewards and incentives received by investors can sometimes be taxed, too. These rewards and incentives can be considered taxable income by tax authorities, but this depends on a number of factors.

The nature of the reward – whether it’s a product, a service or an equity – can affect how it is taxed. A gift could be classed as taxable income, while the receipt of shares could result in Capital Gains Tax or dividend tax payments to be made. The campaign purpose can also have an impact: whether it is a personal project, a charitable cause or a business startup may influence tax implications.

When asking, “do you pay tax on crowdfunding?”, you should also consider reporting requirements. In some cases rewards or incentives gained through crowdfunding may need to be reported as income on an individual’s tax return.

If you are running a crowdfunding campaign, accurate documentation is vital. Be sure to keep detailed records of the campaign, including the funds raised and the rewards distributed, to ensure accurate tax reporting.

Finally, don’t forget about business expenses. If your crowdfunding campaign is for a business and features investor rewards, certain costs for producing and shipping these rewards may be tax deductible.

So, do you pay tax on crowdfunding? Is crowdfunding tax deductible? As you’ll have seen, the answer to both questions isn’t a simple yes or no. Both crowdfunders and investors alike may face tax liabilities as a result of a campaign, so it’s important to fully understand different campaign types and reward types before participating.

While the taxation rules around crowdfunding may seem complex, don’t let them put you off. If the future of your business depends on the money – whether gifted, equity or a loan – that you receive through crowdfunding campaigns, simply take the time to gain a good knowledge of the rules to stay on the right side of HMRC.

If you need assistance with the accounting and taxation side of crowdfunding, get in touch. QAccounting’s decades of experience—including niches like crowdfunding—will help you run your next crowdfunding campaign easily.