Crowd funding has given a shot in the arm to business, especially in these times of limited access to more traditional forms of finance. It’s been a year since Kickstarter the world’s largest crowd funding platform for creative projects launched in the UK and during that period £120 million has been raised, so it’s important that project teams plan for tax implications that could arise on funds raised in this way. In a worst case scenario tax could be charged on funds raised which have already been used in the project, causing serious issues for the wider project business.
Crowd funding is a collective effort to raise funds on the internet through multiple small pledges. NESTA believe by the end of 2015, up to £15 billion a year could be raised on crowd funding platforms globally. Even established businesses are turning to crowd funding. Aardman raised £75,000 in just 8 days to fund a Morph production.
On Kickstarter the project team pitch their idea to the crowd with a financial target. Individuals make pledges but nothing is taken unless the full target is met. If the project falls short of target no money is received, a neat way of reducing project failure risk for the investor. The current failure rate on Kickstarter is about 43% however for the project team this may not be a wasted effort, as it gives them the opportunity to test out ideas, raise awareness and connect with other individuals who could help take that project forward. If the target is achieved then funds are released and this is where careful financial planning is vital.
With Kickstarter the project seeks funding in return for insight into the project and commonly rewards to incentivise pledges, the larger the pledge the more desirable the reward. Kickstarter is not a platform for taking equity or making loans. Typical rewards include pre-launch access to a game, exclusive web content and even production credits. Rewards may also be more tangible such as tickets to events or small gifts like t-shirts. If we consider the accounting and tax implications of these rewards monies have been received which could be credited to income and trigger tax liabilities. If this is not considered and the funds applied in full to the project without reserving for such liabilities should they arise then the project could be facing a serious issue. Depending on each projects circumstances VAT may be due on monies received as goods and services may have been supplied. Business tax on profit may also arise. Such issues if unexpected may even affect the ability of the project to complete its stated objectives.
Crowd funding provides great opportunities for creative projects to raise money. To make sure there is no sting in the tail, be sure to consider the practical implications of accounting for the project and seek professional advice as part of structuring the project. After all who doesn’t want to see more Morph?