Here’s an interesting, ‘Web 3.0’ accounting query that one of our clients posed us recently. If you raise money for your business through a crowdfunding website (Kickstarter, Indiegogo or Seedrs, for example), what is the correct way to account for the money you raise?
This is an interesting question primarily because accountancy is such a lumbering, legislation-laden beast that no rules specifically governing crowdfunding exist, so we have to piece the answer together using existing regulations and case law.
What we’ve put together below is our senior accountants’ interpretation of the rules based on the available information, in relation to the Corporation Tax treatment of crowdfunding for non-charitable organisations. In future, specific legislation may be established around crowdfunding.
Gratuitous Receipts vs Sales
The key to deciding how crowdfunded investment should be properly recorded is to understand the difference between gratuitous receipts and sales.
Gratuitous receipts are, to put it simply, gifts to your business. Crucially, a business does not pay tax on gratuitous receipts. The ideal situation for a crowdfunded business, therefore, would be for it to consider its new investment a gratuitous receipt, as it would not have to pay tax on the investment.
However, to be classified as a gratuitous receipt the investment must satisfy several conditions, including:
– The payment is made after any trading associating has ceased
– Any gift is in recognition of past services rendered, not because past services had been inadequately remunerated
– There is no suggestion that a business connection might be established or reestablished at a future date
And most importantly:
– Any gift must be unsolicited, unexpected, and completely voluntary in nature.
(For more information on the case law surrounding gratuitous receipts, see Simpson v Reynolds & Co (Insurances) Ltd (1975), Murray v Goodhews (1978), and McGowans v Brown & Cousins (1977).
Unsolicited & unexpected?
Crowdfunding can satisfy all of the above conditions except the last. It is our conclusion that by submitting your company or project to a crowdfunding website, or by including a “donate” button on your own website, you are “soliciting” investment. The investment would also not be “unexpected”, as obviously the aim of fundraising is to do just that; raise funds.
The other key element to a gratuitous receipt is that the person offering the gift must not receive anything in return. Many crowdfunding sites allow companies to reward investors with small gifts or an eventual delivery of their finished product.
In these instances the investment cannot be classed as anything but a sale, and as such is subject to Corporation Tax. Even if an individual invests £10,000 and only receives a chintzy commemorative plate in return, they are still handing over money with the expectation they will receive something in return – hence the transaction is a sale. As our senior accountant Tim puts it – “There’s no law against agreeing to a really, really bad deal.”
For the reasons above, our accountants have concluded that the vast majority of crowdfunding exercises must be accounted for as sales. Obviously this is not ideal for those receiving the money as it means their investment is taxable, however given the existing case law and the mechanics of crowdfunding websites it is the only logical conclusion.
Hopefully as crowdfunding establishes more of a foothold in the UK investment landscape exemptions will be introduced. For now though, if you’re thinking about raising money this way don’t hesitate to get in touch with your Crunch accountant who can advise you on the best course of action!