A little help from your friends

November 30th 2023

You have been offered financial donations from friends and family to help start your new business. If it’s a success, you plan to reward them. What would the tax position be for the business and the donors?  Kenny Logan from our Edinburgh office explains.

It’s far from unusual for close relatives and occasionally friends to offer help to someone to get their business off the ground. This might be the use of their time and expertise or providing cash. There are no tax issues to consider for non-financial help but there can be where finance is involved.

Whether finance for a business comes from friends, family or even crowdfunding, the tax consequences depend on any terms linked to it. For example, you could receive donations where nothing is given in return, or where the donor receives a financial benefit (in cash or in kind), loans (interest-free or not) and money in exchange for a stake in future profits or a capital share should the business be successful.

For donations that are apparently goodwill gestures there are differing views on the tax treatment. Where the donation is truly with no strings attached and without an ulterior motive, it is not taxable on the recipient business and there’s no tax relief for the donor. Generally, if there’s an existing or subsequent trading connection between the donor and the recipient business, the donation is taxable.

If your business gives the donor something in exchange for their money it will be a taxable arrangement unless what’s given is no more than, say, publishing an acknowledgment or a gift of trivial value. For example, a shop that asked its customers to donate to the construction cost in exchange for discounts. This is a trading arrangement and so taxable income for the business being funded. There are no tax consequences for the donors.

VAT must be accounted for if something other than a mere acknowledgment or a business gift of trivial value (no more than £50 per year) is given in return for money. For example, out of a £600 donation received you would have to account for £100 VAT to HMRC.

If you receive donations before you need to be registered, no VAT liability arises.

Where investment from friends, family or crowdfunding is given in return for a stake, e.g., shares in your company or the right to acquire shares, the money received isn’t taxable even where there’s a trading relationship. The money given is really an investment rather than a donation and there’s no tax relief for the investor unless your company and the investment qualify for one of the special tax schemes, e.g. the seed enterprise investment scheme.

Money received as a loan from an individual is not taxable for the recipient business nor tax deductible for the person who made the loan. If any interest is paid to the lender, it is taxable and, where the loan was used by the business for its trade, it can claim a tax deduction.

No strings attached donations have no tax consequences. Conversely, if you offer rewards to the donors other than a gift of trivial value, the amount received counts as taxable income of your business. Money received as a loan or in return for a stake in your business isn’t taxable income.

Our Tax department would be more than happy to answer any additional questions you may have, please do get in touch.

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