Crowdfunding platforms are worried that a tax on rewards for small investors could stop start-up businesses from seeking backing via the alternative finance phenomenon.
The European Union’s Value Added Tax Committee is considering imposing VAT on rewards to crowdfunding donors.
These donors typically part with a small sum of money in return for recognition in the way of a gift from the start up looking for seed capital.
Gifts popular with start-up entrepreneurs include T-shirts, mugs or books. Other recent rewards have included tickets to coffee roasting workshops, the opera and designer handbags.
Some of these rewards have been valued at up to £350 each.
The EU is concerned these incentives in return for non-refundable donations to a business are really cash transactions that attract VAT.
Crowdfunding platforms are tight-lipped over the move but privately, are concerned that small investors and entrepreneurs could be deterred from adopting crowdfunding as an investment model if they have to pay and collect VAT on rewards.
Some crowdfunding pitches attract thousands of investors who hand over less than £50 as a donation in return for their gift.
The platforms would also have to overhaul their software systems to account for VAT.
Tax advisers fear cash-strapped entrepreneurs would have to take on staff to administer VAT accounting and payment which would make their start-ups more expensive.
“Such a move could deter many from the market,” said Stian Westlake, executive director of policy and research at NESTA, a charity involved in crowdfunding.
Start up budgets
“Entrepreneurs would have to consider if the extra burden was worthwhile and whether the cash could be raised from an alternative source.”
The move seems at odds with EU policy, which is to encourage cross-border crowdfunding initiatives.
In the UK, no tax is involved in raising money through a crowdfunding platform as the cash is considered an investment rather than income.
However, in the US, the Internal Revenue Service (IRS) is known to be looking at whether crowdfunding cash is an income for entrepreneurs that should be taxed.
The problem for EU tax authorities is putting a price on the value of a reward and then taxing that price uniformly across the EU so investors in one state are not at a disadvantage with those in another.