Crowdfunding has become a popular method in the UK for raising funds for various projects and businesses. It involves collecting small amounts of money from a large number of people, typically through online platforms. Each type of crowdfunding has its own set of rules, especially when it comes to tax implications.
Types of Crowdfunding
- Donation Crowdfunding: Ideal for charities or social causes, where people donate without expecting anything in return. For charitable projects, donors can claim Gift Aid, enhancing the value of their donation.
- Reward Crowdfunding: Backers fund a project in exchange for non-monetary rewards, such as products, tickets, or other incentives. This is common for creative projects.
- Equity Crowdfunding: Contributors receive shares or a stake in the business they support. This method suits those looking to invest directly in startups or small businesses.
- Debt Crowdfunding (Peer-to-Peer Lending): Investors lend money to projects or businesses and expect repayment with interest. This is also known as peer-to-peer (P2P) lending.
Tax Implications of Crowdfunding
- Donations: No tax relief for backers unless the donation is to a registered charity, in which case Gift Aid can be claimed.
- Rewards: No tax reliefs are available since rewards are considered advance payments for goods or services.
- Debt: Interest earned is taxable under savings interest. However, if a loan isn't repaid, investors might qualify for "CGT Loans to traders relief" or Social Investment Tax Relief (SITR).
- Equity: Capital Gains Tax applies on profits from selling shares, and dividends may also be taxed. However, investments in startups through the Enterprise Investment Scheme (EIS) or the Seed Enterprise Investment Scheme (SEIS) offer tax reliefs, including CGT exemption on profits and loss relief should the business fail.
Special Investment Schemes
- Enterprise Investment Scheme (EIS): Allows investors to claim up to 30% of their investment as Income Tax relief, subject to certain conditions and limits.
- Seed Enterprise Investment Scheme (SEIS): Offers even more generous tax reliefs for investing in early-stage startups, including up to 50% Income Tax relief.
Both EIS and SEIS also provide Capital Gains Tax exemption for profits earned from the sale of shares, making them attractive options for investors looking to support new ventures while benefiting from tax incentives.
Conclusion
Crowdfunding in the UK offers diverse opportunities for funding projects and businesses, each with unique tax considerations. Understanding these can help both backers and project initiators make informed decisions and potentially benefit from tax reliefs, especially when investing in startups through schemes like EIS and SEIS.
