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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15915
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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, Happy Easter :), I really need some advice on VAT;

Resolved Question:

Hello, Happy Easter :),
I really need some advice on VAT; i have just just finished university last September and i decided to continue with running my own business since, i turned down some good job offers to try and build up my business to support me full-time and it's been a pretty interesting roller coaster working 15 hour days since then (what's this 'bank holiday' eh? ;) ), and the roller coaster continues with VAT registration.
Last November I ran a very successful crowd funding campaign producing board game parts (https://www.kickstarter.com/projects/1207385459/twisting-catacombs-miniature-dungeon-scenery) the initial target was £5.5k but in the end it rose to £108k (after fees) which has caused loads of problems. This money is received all in one go, one lump, and will be pretty much the sole business income (aside from a few minor website store sales and client's jobs) for the next 14 months or so while i complete designing, prototyping and manufacturing the board game pieces for all the "backers" who bought into the project.
I have been running the business as a sole trader while i was at uni (bit of extra beer money! ;) ) The previous years turnover have been
10/11 £8,350
11/12 £2,458
12/13 £8,530
13/14 £18,421
This year, for all sources of revenue, im projecting £148k revenue.
Due to the nature of these kickstarter campaigns, margins are very slim as "backers" expect the best deal possible on these campaigns, and i had not planned on paying VAT or factored that into costs. As most of my costs are paying freelance staff for production and design, there is also very little i can claim VAT back on, which is going to mean vat registration will be pretty much take a direct chunk out of profits. Which will mean my hourly rate is well below minimum wage, and i cant expand the business.
I seem to be being channeled into registering for VAT, although this is a one-off funding campaign which will not be repeated next year, turnover will drop well below the VAT threshold again (estimating around 50k turnover next year) and logic would dictate that this is a perfect case for a VAT exception from registration?
I applied to HMRC for a VAT exception, each person i talk to on the phone (even the person who ruled on my case and presumably read through and reviewed my situation..) says they have never heard of "Kickstarter" or Crowd Funding and im not sure if its just them not spending the time to completely review the full situation, that this is a one-off influx of funds, or that im being too naive to expect to have made myself any money and that i should be paying VAT.
They replied saying im not eligible for a vat exception because my 'revenue will not fall below the VAT threshold in the next 12 months'. Which seems completely unfair as if funds had been raised over two separate days (55k one day 55k the next), then the rolling 12 months would have knocked 55k off, inside of the 12 months forward look, on day 364/365, and i would have been eligible?
Is it worth appealing their decision? Any help and advice on the best course of action, would be very much appreciated.
I really want to make my business a success and i was planning to rent out a premises and hire staff so i can continue making a living from this in the future. Sorry if i come across a bit miserable.
Many thanks
Eddie
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
Hi.

Are the funds you raised from kickstarter and crowdfunding loans which you have to repay or investments whereby you have sold a share of your business? Do you run your business as a sole trader or a thorugh a limited company?
Customer: replied 2 years ago.

Hi Tony,

Im now an Ltd, formed the day before receiving the 110k funds

Essentially, lots of people "pledge" their funds, then months in advance, they receive goods in exchange (what goods they have chosen for their "pledge").
It could been seen as a sort of "pre-order" system where people put their faith in the creator (me) and with their funds the creator brings the project to life and delivers their goods.

Crowdfunding only started about 5 years ago and its become quite popular in the last 2 years. All the VAT law im reading seems to be all from 1994..

I can paste you in the correspondance from HMRC so far here. I have another week or so to appeal the decision if i have a leg to stand on and it is worth doing so.

Expert:  TonyTax replied 2 years ago.
Thanks.

Leave this with me while I draft my answer.
Customer: replied 2 years ago.

Sure, thanks for the help Tony :)

Expert:  TonyTax replied 2 years ago.
Hi again.

I realise that the horse has bolted and you didn't expect the kickstarter funding to have taken off as it did but you should have taken advice from an accountant or tax adviser on the tax implications beforehand. Accountants and tax advisers fees may appear hefty but find yourself a good one and they are worth their weight in gold.

As the investors will be getting something in return, the money you raised is taxable income and is subject to VAT. You've fallen foul of the rules because your turnover won't have fallen below the threshold in the next twelve months after you initially hit the threshold and I understand your frustration at the apparent unfairness of the extra day making such a profound difference.

The HMRC staff at the level you have spoken to clearly don't understand what crowdfunding is and those at a higher level who write the letters look at the law in a blinkered fashion. This is especially true of the VAT side of HMRC.

Because of the nature of crowdfunding transactions and it is relatively novel, the law can be slow to catch up and put down specific rules (though some would argue that what existsis fine). There is a possibility of arguing when the supply was made, the basic rules for which you can read here, and I've even read articles the idea is put forward that because there is no obligation to provide a reward to an investor according to the terms of some crowdfunding sites, it is possible to claim that any such reward that is made is a partial repayment of a loan and is, therefore, the original "investment" is not taxable income or subject to VAT. I think thats a long shot myself.

If I were in your shoes, I'd appeal and take it all the way to a tribunal simply because of the difference a day makes to your business, to possibly make the VAT people rethink and to have completley independent people look at your case. HMRC resources are stretched so take advantahge of it. If you can afford it, get some professional advice from accountants or tax advisers involved in the tax issues around this type of business funding.

I hope this helps but let me know if you have any further questions.
Customer: replied 2 years ago.

Hi Tony,
Thanks for the advice and answer. I feared it may be the case that the law doesnt really take this kind of new situation into account, where a years revenue arrives in one day.

Ill do you mention, appeal, then see about a tribunal (i just bought a new suit anyway...may as well air it out!).
I guess if i register i can always look at the possibility of a VAT flat rate scheme later on, which will save a big chunk.
Best regards

Eddie

Expert:  TonyTax replied 2 years ago.

Thanks and good luck.

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