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When does VAT forward look apply to crowdfunding?

When the pledge is made, when the funds are received, or when the goods are delivered?

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Background: I use Kickstarter to raise money for manufacturing a product which is then supplied to my Kickstarter backers, many months after payment has been made. I understand these transactions count as sales and are potentially subject to VAT. Thus far I have not registered for VAT as my sales have been well below the VAT registration threshold, and I don't expect this to change for some years (my last two campaigns each raised a mere £15k). But I'm concerned about what would happen if a campaign was unexpectedly successful.

The problem: Suppose I have an unexpectedly successful campaign which generates pledges over the VAT registration threshold. I understand that under the backward look rule, I only become liable some time after my sales exceed the threshold.

But with Kickstarter, pledges made during the campaign are not paid (and therefore received by me) until a fortnight after the campaign closes. So in the event of a highly successful campaign, I could easily find myself in the position of having pledges that exceed the VAT threshold, a month or so before I receive payment. There is some uncertainty involved: customers can in theory withdraw their pledges before the end of the campaign, and their payments might be declined after the campaign closes, leading to me not receiving the funds. In practice this accounts for a fairly small % of funds.

It is worth noting that I cannot change the amount I charge a customer for a pledge between the pledge being made and the funds received. It would however be possible if utterly nightmarish to change how much I charge customers who pledge after the threshold is exceeded. So I have limited ability to start charging for VAT midway through the campaign, and no ability to charge customers who have already pledged.

The question: Would the fact customers have made pledges exceeding the VAT threshold mean that there's a reasonable expectation that my taxable supplies will exceed the VAT threshold? And does this in turn mean I would be required to register for VAT mid-campaign? And because the funds would then be received after I register, I would be liable to pay VAT on all of the pledges, including the pledges made prior to my registering for VAT?

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RLI
By lionofludesch
22nd Dec 2018 10:57

Would the fact customers have made pledges exceeding the VAT threshold mean that there's a reasonable expectation that my taxable supplies will exceed the VAT threshold?

Probably - but it depends on your experience in turning pledges into hard cash. If your experience was that only 50% pay up, you'd need £170k of pledges to expect £85k of sales.

And does this in turn mean I would be required to register for VAT mid-campaign?

Could do, yes. I'd say 30 days before the date folk are due to pay you.

And because the funds would then be received after I register, I would be liable to pay VAT on all of the pledges, including the pledges made prior to my registering for VAT?

Could do, yes. You don't seem to have any sort of firm agreement until the money arrives so that seems to be the date of your sale.

Feel free to tell us more about what you're selling and the deal you offer.

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Replying to lionofludesch:
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By rabalias
22nd Dec 2018 15:23

lionofludesch wrote:

Feel free to tell us more about what you're selling and the deal you offer.

Sure. I'm selling books - roughly £25 a pop, though a good share of customers opt for PDF-only versions, and another good share buy some fancy reward like having their portrait included in the book art. A small share give money for no reward.

The deal is the same as always with Kickstarter. Give me money and I'll give you whatever is written on the reward tier (which varies as above). I believe case law has it that this creates a contract to provide the goods, though I'm not confident on whether that's UK or US case law. I certainly treat it that way.

The slightly oddity, I guess, is that Kickstarter collect the money, take a % fee and then pass on the remainder, so I don't receive funds direct from any one customer.

The timeline is:
Day 1 of campaign to day 30 of the campaign - people pledge money to the campaign, selecting some reward (or no reward). They can withdraw or increase their pledge at any time during this period, and probably about 10-20% of customers do, though it's rare for the total raised to go down on any given day.
End of day 30 - campaign closes. If sufficient funds were raised, customers are charged by Kickstarter. Some payments are rejected at this stage (say 5%)
14 days later - I receive the funds from Kickstarter, minus 8% in fees.
For the following 6 months, I complete work on the product, commission art, and get it to the printers.
About 6 months after the campaign closed, I send out the product to customers.

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chips_at_mattersey
By Les Howard
22nd Dec 2018 15:25

The tax point rules also mean that the date of receipt is when the customer makes the pledge, not when you actually receive the money, since Kickstarter, I presume, is acting as your agent.
This may bring forward your date of registration.

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Replying to leshoward:
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By rabalias
22nd Dec 2018 15:42

Les: that is extremely interesting. The flow of funds in a Kickstarter is typically very uneven. Specifically, you'd expect normally to see a pattern like this:
Day 1: 30% of total funds
Day 2: 20% of total funds
Day 3-28: hardly anything, maybe 1-2% of total funds
Day 29-30: remaining 10-20% of funds

My understanding is that any time an actual trade triggers VAT registration, that trade itself is not retrospectively included. So potentially it's a big deal if the pledges themselves are the trigger, because it could be that I don't have to retrospectively include 30% or even 50% of the funds I raise. Does that sound right to you?

Put it another way, suppose I'm not registered for VAT, and I unexpectedly raise £86k on day 1, clearly I'm now going to have to register for VAT, but do I have to pay VAT on the money I raised on day 1?

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Replying to rabalias:
RLI
By lionofludesch
22nd Dec 2018 15:45

rabalias wrote:

Put it another way, suppose I'm not registered for VAT, and I unexpectedly raise £86k on day 1, clearly I'm now going to have to register for VAT, but do I have to pay VAT on the money I raised on day 1?

No, because then you'd be registering on the basis of past turnover, not future turnover. The rules are different.

If day 1 was today, you'd need to register from 1st Feb 2019, the first day of the second month after the month in which you cross the threshold.

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Replying to leshoward:
RLI
By lionofludesch
22nd Dec 2018 15:42

Yeah, I thought the tax point might be the date the order becomes unconditional but, given this further information, I agree with Les.

Worth pointing out that traditional books on paper are zero rated but do count towards turnover thresholds.

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Replying to lionofludesch:
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By rabalias
22nd Dec 2018 15:56

lionofludesch wrote:

Worth pointing out that traditional books on paper are zero rated but do count towards turnover thresholds.

I should probably highlight that these are RPG books (roleplaying game). I'm not sure I understand the nuances around zero-rating here: the book itself is not used in the game at all, it doesn't contain game components or a game board or anything like that. It's in effect about 50% an instruction manual to play the game, and 50% inspirational fiction that supports playing the game.

Maybe that means it isn't zero-rated?

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Replying to rabalias:
RLI
By lionofludesch
22nd Dec 2018 16:04

Still sounds booky to me. Pages with writing on.

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RLI
By lionofludesch
22nd Dec 2018 15:48

Thinking about how the tax point rules apply to your business, I'm thinking that past turnover rules are far more likely to apply than future turnover rules.

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Replying to lionofludesch:
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By rabalias
22nd Dec 2018 16:00

Bit puzzling, this. (Well, to me anyway.) I know I have to register immediately if I'm expecting to make at least £85k in the next 30 days. If I make the money in one big bang, I don't have to register for many weeks after that. But the way money flows in a Kickstarter can make both true at the same time.

For example, suppose I make £1m on day 1 (nice problem to have), I would then expect to make well over £85k on day 2. So am I then required to register immediately under the forward look rule? And if so, I have to pay VAT on day 2 and onward, but do I not have to retroactively pay VAT on the earnings from day 1?

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Replying to rabalias:
RLI
By lionofludesch
22nd Dec 2018 16:07

rabalias wrote:
.....but do I not have to retroactively pay VAT on the earnings from day 1?

Did you expect to take the £1m before you took the £1m ? No.

So the £1m isn't based on expectation of future turnover, is it ?

By the time you know you've taken £1m, it's past turnover.

Not rocket science.

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Replying to lionofludesch:
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By rabalias
22nd Dec 2018 16:51

In that case hopefully my next question will be equally straightforward to answer: At what point do I have to apply the logic of "I've earned a lot in this Kickstarter so far, I now have a reasonable expectation that I'll earn over £85k in the next 30 days, so therefore everything from this point on is liable for VAT"?

Like, in my example above earning £1m in the first day. It doesn't come as a lump sum. So maybe by midday I've already earned £300k. It's patently obvious by now that it's going to be a blowout. So does the forward look rule apply from midday? Or do HMRC only work in whole days?

You might be wondering why I'm even asking now, since books are zero-rated, but there's still PDF sales to consider - which I understand are not zero-rated.

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Replying to rabalias:
RLI
By lionofludesch
22nd Dec 2018 17:03

That's true - and it's why you need to visit an accountant.

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