The European Commission might soon impose VAT on crowdfunding rewards - what could this mean for you?
Today’s piece isn’t so much a legal analysis as it is a warning to look out for something in the future – in a working paper published 6 February 2015 the European Commission (EC) confirmed they are looking to impose VAT on crowdfunding rewards. This could have major implications for game developers currently using reward-based crowdfunding as their source of financing.
What is VAT?
VAT is a tax on business transactions – typically charged @ 20%. You only have to collect VAT if your business’ yearly turnover is above £82k (note rules on digital product distribution though which require businesses to pay VAT on cross-border sales even if under the local tax threshold) but you can also opt in (in order to reclaim “input tax” – see below) if under this amount.
How does VAT work?
The idea behind VAT is that it is the end-consumer only that bears the tax as the others in the chain can reclaim it. An example:
What are the EC’s proposals?
1. That supplying crowdfunding rewards constitutes a supply of “goods or services” and is thus subject to VAT
2. The taxable amount of the goods or services is the amount received by the campaign organiser (before Kickstarter takes their cut), and not the actual value of the physical reward itself. i.e. even if the reward is worth far less than the amount donated the ‘taxable amount’ is the amount actually donated
3. In extreme cases where the value of the rewards is so disproportionately low compared to the amount donated, there is a case to be made that the contribution was a donation, rather than a taxable transaction.
What does this mean in practice?
Let’s say a developer offers t-shirts (valued at £5 each) as a reward for a donation of £25 from the backer.
Why is the EC Proposing this?
One source states that “the Commission's plans do not present any new taxation on crowdfunding and is simply the Commission shining light into a relatively unexplored area, where some businesses may have not yet fully considered the tax implications of what they are doing.”
In other words, it’s just an example of enforcement catching up to a relatively new form of financing.
At this point in time, the EC’s proposals have only been sent to the EU’s VAT Committee and have not yet been implemented. Now it’s a waiting game to see whether or not the Committee agrees with the EC’s proposals and puts these into effect.
If they are though, crowdfunding campaigns may either start to offer fewer rewards or build into the donation thresholds additional £ to cover the tax that will be payable on each reward (so in effect you'd have to donate £30, rather than £25, to receive a t-shirt to account for the £5 that will be lost to VAT). This change will certainly increase the administrative burden on small developers in claiming and paying this tax.
Definitely something to keep you eye on if you're planning on running a crowdfunding campaign in the future - I'll update this post once the Committee releases their response.
Header Photo: (c) owned by Square Enix - thanks for making Vivi so awesome!