Are you considering running a crowdfunding campaign to finance new business initiatives? You may have questions about the tax implications.
Crowdfunding remains an attractive choice among entrepreneurial small businesses to raise funds in 2018. In fact, its popularity is said to double every two months globally. The appeal is obvious – it’s a relatively easy way of raising finance quickly, provided, of course, you have an attractive proposition for people to buy into. Rather than having to persuade one investor to hand you a large sum of money, you have to convince a large number of people to give you a small sum each. Depending on the type of crowdfunding you choose, the amount can range from as little as £1 to £1,000 or more.
Common types of crowdfunding
- Rewards-based crowdfunding is the most popular form thanks to global platforms such as Kickstarter and Indiegogo. Investors pledge an amount to your project which is deducted only once the fundraising target is met. In return, donors receive a reward depending on the amount they’ve pledged. Typically though, ‘investors’ participate in return for the first release of a new product or a significant discount on the retail price. However, people have been known to fund for quirkier reasons too.
- Donation-based crowdfunding is similar in that funders pledge a small amount – however, they do not receive anything in return. This type of crowdfunding is prominent among charities and social enterprises.
- Equity-based crowdfunding is most commonly used to launch a new business or to fund business growth, rather than a specific product. Your investors buy equity in your company. This type of crowdfunding has its risk because if the business fails, investors lose their money. If, however, the business is a success, investors can often count on huge returns. This is similar to more traditional venture capitalist funding scenarios but on a smaller scale.
- In Peer-to-Peer lending, lenders backing your cause receive a return on their loans according to the terms you set. This model is similar to the way a bank loan works, so interest rates apply, but instead of borrowing a large sum of money from the bank, you’re borrowing smaller amounts of money from a large number of people.
What about taxes?
Knowing where you stand with your taxes after a crowdfunding campaign can be tricky. Contrary to voluntary donations received in a personal capacity, the donations received through crowdfunding a business are considered taxable income. Depending on the campaign you choose, both corporate tax and VAT could apply. In the case of equity crowdfunding, however, you might be eligible for tax relief under the Enterprise Investment Scheme (EIS) and the Seed Enterprise Investment Scheme (SEIS). Meanwhile, in the case of peer-to-peer lending, you might be eligible for social investment tax relief.
Get advice from Tax Agility
Feeling confused about the tax implications of the different types of crowdfunding models is understandable. To avoid unnecessary tax complications later, it’s better to get sound advice before you start a new crowdfunding initiative. In this way, advisors like Tax Agility can not only help you minimise your tax exposure, but also identify tax relief schemes you may not know exist.
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