A start-up business is planning to use a crowd-funding site to generate initial orders for a new product.
The target is to initially raise around £25k. If the crowd-funding is successful, this cash would be received around January 2015.
As the business is not VAT registered yet, and the cash received will be well below the VAT threshold, no output VAT will be payable in respect of this receipt.
The owner wishes to register for VAT shortly after receipt of the money, so that he can reclaim input VAT on the materials he buys to fulfil the crowd-funded 'orders', but as the tax-point for the 'sale' is the date of the receipt of the cash rather than the despatch date of the goods, no output VAT will be accounted for.
This feels wrong to me, but are there any VAT rules or legislation that stops this from being done?
Thanks
Replies (10)
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VAT registration
We have two issues to look at here.
Firstly the receipt of the crowd funding money will either be a loan, a subscription for shares or a combination of the two. These items are nothing to do with VAT and do not impact on any VAT calculation at all.
The second issue is VAT registration. There is nothing wrong at all with registering for VAT and reclaiming the input tax before any sales are made, it is a standard position in any start-up business.
Crowdfunding
Actually, a crowd-funding receipt is extremely likely to be neither of those. Crowd-funders receive rewards which vary depending on the level of funding provided. These will often be "free" copies of the product being crowd-funded but can include other items unique to the crowd-funding project itself. Firstly the receipt of the crowd funding money will either be a loan, a subscription for shares or a combination of the two. These items are nothing to do with VAT and do not impact on any VAT calculation at all.
The reclaim of the input VAT is tied to it being related to VAT sales. If the crowd-funding receipts are all pre-registration (and hence not VAT sales), then any purchases to fulfill them are, by definition, not related to VAT sales. Even though the purchases are made post-registration, they are all used up in pre-registration sales.
I don't agree with Peter. If the Crowfunding is in return for goods or services (which can often be the case), then there's a supply for vat purposes.
Before you register do the maths, VAT registered or not.
You will probably find that the trader is better off waiting until VAT registration become compulsory.
Do I have the wrong end of the stick?
May have the wrong end of the stick here.
Having read the post again I am confused as to what the £25K receipt will be, is it possible to give more detail about this please.
Interested in legislation
I too am very interested in this point.
The tax point does appear to be at the point the monies are received. It feels wrong that VAT can be reclaimed on the purchases to fulfill those sales BUT is there actually anything in legislation to prevent this?
FYI another related Aweb question here:
https://www.accountingweb.co.uk/anyanswers/question/vat-registration-adv...