The popularity of crowdfunding has evolved rapidly since the concept was first introduced to the UK in 2005. While consumers latched on quickly, it wasn’t until the global financial crisis that businesses really took hold, as banks were forced to cut back on lending.
A string of hugely profitable crowdfunding projects has cemented the format as a popular means of funding new ideas. However, there are a number of planning and taxation issues to consider in order to give your idea the very best chance for success.
Financial considerations with crowdfunding
This speaks to one of the most important factors in any crowdfunding campaign: financial planning. Whether your campaign is in the single digits, the tens or the hundreds of thousands, being prudent and realistic with your budget and timescale are pivotal to success.
For many businesses delivering rewards, this may be the first time you have dealt with a major manufacturing project, or it may be on a much larger scale. This can also snowball quickly if your project is more successful than anticipated, requiring more time, labour and raw materials.
Economies of scale can mean that the cost of manufacturing and shipping can fall or rise depending on the number of backers you receive. You also need to have contingencies and leeway for unforeseen circumstances, and an understanding of international tax and shipping.
What’s more, campaigns can be extremely changeable. You may have to react to design changes in your product, the realities of the manufacturing process, or the addition and fulfilment of ‘stretch goals’ for higher investment values. All of these factors will need to be considered to ensure your campaign is financially viable.
Tax issues with crowdfunding
As well as the issue of fulfilment, you also need to be mindful of the way crowdfunding investments are taxed. Because certain kinds of crowdfunding campaigns do not delegate financial rewards, many people think that all investments are actually donations.
Legally however, this is only likely to be the case if there are no rewards or other incentives for giving money to a campaign. Donation-based crowdfunding usually counts donations as gifts, which therefore tend to be tax exempt. Reward-based and equity-based crowdfunding tends to be classified as income, and is therefore subject to income tax, and potentially even sales tax.
It’s important to plan for these deductions so you don’t receive any surprises. Even a minor miscalculation can unblance your finances, and make fulfilling pledges more of a challenge.
Thankfully, several government schemes have been set up to cater to the demands of crowdfunding, and more generally to the sourcing of investment for early-stage businesses. These include the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS) in the UK, as well as others throughout Europe and further afield.
As a relatively new and sometimes underutilised process for seeking funding, not all accountants are familiar with the many options involved in crowdfunding. We can guide you through the whole process, highlighting and assisting with the best options for your business.
Our crowdfunding package
Our complete package of crowdfunding services can guide your business from formation to fulfilment of rewards. This can include (but is not limited to):
- Setting the company up
- Setting up the campaign on the crowdfunding platform
- Prepare business plan to attract investors
- Setting up structure required
- Answer any questions investors have
- Accounting, tax and VAT solutions
We’ve successfully helped a number of our clients get the financial backing they needed with the minimum capital outlay. Our recent successes include working with a Danish entrepreneur to help set up their UK company and raise £150,000 for an online magazine platform.
For more information on how Accountancy in Europe and our partners can assist you with your crowdfunding campaign, or any other information on accounting and business services in Europe and beyond, please get in touch