The EU is debating whether to impose VAT on crowdfunding.

With the changing environment imposed by a fast developing online world, there are many challenges still not tackled appropriately. Specifically, the EU is working on its Digital Agenda 2020, with the aim of stimulating e-commerce in the internal market while ensuring consumer protection. This involves rethinking legislation in order to adapt it to the online world, and it applies to financial services too.

Crowdfunding refers to the practice of funding a project by raising money from a big group of people, and this is normally done via the web. As e-commerce expands and more people feel comfortable using the internet, this trend has turned increasingly popular, attracting eyes to this practice and leading to some issues concerning its taxation.

Is Crowdfunding a Financial Service?

Effectively, the increasing popularity of this practice which already involves considerable amounts of money, has attracted the attention of EU VAT lawmakers. The same has happened with bitcoins and other digital currencies, and the same will eventually happen with any new development that involves technology and financial services.

The EU has launched an investigation to determine whether tax should apply to funds raised on peer-to-peer platforms. If the investigation turns out positive on the tax, it would mean that all the money raised within the UK via crowdfunding platforms will be subject to a 20% tax premium.

The investigation, now in hands of the EU VAT Committee, consists in analysing the EU VAT Directive to determine if crowdfunding should be defined as a financial service or not. The Committee works towards achieving a uniform application of the provisions of VAT Directives through all the Member States of the EU.

What is under particular scrutiny by the commission is the practice of “reward crowdfunding”. This practice, particularly common in business to consumer crowdfunding campaigns, refers to such platforms where members of the public are offered goods or services in return of their investment. However, the issue must be tackled with care, since it is undesirable to harm the competitiveness of local platforms with more established US-based markets. This might be the result of applying a large tax bill to the sector.