I am speaking to a newly formed Limited company that is looking to raise finance to fund a project via Crowd Funding. The investors to this particular scheme will not receive anything in return for their 'investment' other than a thank you or thumbs up on the site. The investors will hold no stake in the company and the money is not repayable and so won't be treated as a loan. The question is - how will this be taxed in the Limited company and at what point, if at all. I have tried searching HMRC generally and cannot find any definitive guidance as to how this should be treated. I feel it is akin to donation income. The project is not expected to turn a profit as it is an artistic one. The funding will simply cover the costs of the expenditure on salaries and other overheads an so at the end of the day there wouldn't be much in the way of profit left over anyway - but the timing of recognition could be an issue perhaps if this does need to be treated as taxable income.
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Investors??
"The investors to this particular scheme will not receive anything in return for their 'investment' other than a thank you or thumbs up on the site. The investors will hold no stake in the company and the money is not repayable and so won't be treated as a loan."
Firstly, do you have the names and addresses of these people who cheerfully hand over money for no apparent reason?
On the substantive point, I don't see how these people could be described as investors. On the description above, they aren't investing.
What they seem to be doing is (bizarrely in my view) donating money to a commercial organisation. I assume the receipts are therefore not income for direct tax or VAT purposes.
Which Crowd funding site did they do this?
I'm off to raise funds for next holiday. I promise I will give everyone who backs me a big thumbs up and will toast you all with a big glass of cider. Cheers
Akin to donations
From the looks of it, they aren't investors at all (although the funds are raised through crowd funding). I'd say the income is akin to donations and won't be taxable as "income". I would suggest you get advice from a tax specialist and/or get an opinion from HMRC.
Is this the same as when a musician is finding difficulty in get a deal with a mainstream label fans will pay set amounts to help fund the release of an album. But usually you get something in proportion to the amount you "donate" the minimum being a pre release copy but can include extras usually items not normally for resale?
Because in that case the donors most definitely get something for their money unless the whole project goes belly up.
Hi
/ontopic
I believe that the reality is that the "investors" are donating the money to the founder who in turn "invests" it in the "company". I think you should treat it as capital / loan from your client to the "company" in the normal way.
/offtopic
"The project is not expected to turn a profit as it is an artistic one." - then why should they register a limited company and report it as a trade to HMRC, when it may well be a hobby ?
See:
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20080.htm
http://www.hmrc.gov.uk/manuals/bimmanual/BIM20065.htm
and especially
Timing of donation income recognition
Charitable companies are often in this kind of situation, and the SORP does give reasonable guidance about when donations should be recognised.
Basically - when you know you'll receive the cash with some certainty, then you should recognise it.
One might stretch an argument, to say that there was a constructive obligation to deliver the artistic project, and therefore the income should be deferred - or a cost accrual made, allowing one to avoid a timing difference, and therefore paying tax in the interim. In my view this is stretching it quite far, albeit a reasonable accruals basis for income recognition.
If the company intends to do future similar projects in the future, funded in the same way, then it would be necessary for them to show they deliver projects and create such an obligation on themselves. This might mean you were stretching it less far.