Europe seeks tax on crowdfunding rewards

The European Commission is seeking to impose value added tax on rewards from crowdfunding - prompting warnings that the levy could prevent start-ups from using this accessible form of alternative finance.

Proposals to levy the purchase tax on crowdfunding "rewards" - the incentives that start-ups offer to their small backers - were sent to the European Union's Value Added Tax Committee last month. If adopted, they will make businesses raising money on online platforms such as Kickstarter and Indiegogo charge up to 23 per cent of the value of any items sent to donors.

Many crowdfunded enterprises offer the thousands of individuals who first back them a small reward. For example, Ikawa, a London-based start-up that hopes to make home coffee roasters, is currently offering its Kickstarter supporters tickets to coffee workshops. Rewards from other start-ups include opera tickets and handbags with a retail price of £350.

But the cost and administrative burden of collecting VAT could deter companies that use crowdfunding, particularly as many are in their very early stages, tax advisers have warned. Crowdfunding platforms do not currently collect VAT on companies' behalf.

"There's a risk that the EU cuts off a really agile and growing source of funding for entrepreneurial businesses," said Stian Westlake, executive director of policy and research at Nesta, a UK innovation charity. "It will have a significant chilling effect."

Last year, companies raised £26m on rewards-based crowdfunding platforms in the UK, Nesta estimated.

High-profile European crowdfunding projects have included Elite: Dangerous, a computer game which raised £3.7m on Kickstarter in 2013, and Krautreporter, which raised €1m to launch a German online news magazine.

Richard Asquith, vice-president of global tax at Avalara, a tax software company, said the commission was likely to proceed with imposing VAT on rewards. "Tax authorities are very uncomfortable with these types of schemes slipping through the VAT net," he said. "The immediate problem we're going to have with this is how much is the reward worth?"

<

The tabular content relating to this article is not available to view. Apologies in advance for the inconvenience caused.

Similarly, the commission is also asking whether crowdfunding platforms offering shares in start-ups - so-called equity crowdfunding - or loans should also be subject to VAT. However, these ventures are likely to be exempt as they provide a financial service.

Crowdfunding platforms declined to comment publicly but said they were closely following the debate. But George Bull, senior tax partner at Baker Tilly, said the proposals could "detract from Europe's competitiveness" in alternative finance.

UK tax authorities have already confirmed that crowdfunding for digital products - such as ebooks and films - is subject to new European laws requiring businesses to pay VAT on cross-border sales, even if they operate beneath the local tax threshold.

However, few people crowdfunding for digital products such as films and books are aware of this, warned Barry James, founder of the Crowdfunding Centre, a research company.

"What's really needed is a clarification or guide - not yet more red tape," he said. "A clear and generous VAT threshold is in everyone's interest."

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation