Donovan

Everything you need to know about crowdfunding

Crowdfunding platforms connect businesses and investors, allowing ideas to develop and companies to flourish, but is it for you? Read on to find out.

The internet has changed many of the ways we do business and live our daily lives and unsurprisingly, it has also opened up new avenues in which we acquire fund or invest in things that interest us.

In the UK, crowdfunding is undoubtedly popular with hundreds of millions raised within just a few years. Businesses have used crowdfunding to launch new products and expand, while individual investors can now support ideas and hope that they can make more than what they have put in. It isn’t just for business too – artists, writers, filmmakers, as well as those in need can also use crowdfunding sites to raise fund.

In this article, we aim to discuss:

• What is crowdfunding?
• The four common types of crowdfunding
• The risks of crowdfunding
• Can investors get tax relief?
• EIS and SEIS
• Should you list your business on crowdfunding?

What is crowdfunding?

Crowdfunding refers to a method of raising finance by asking a large number of people each for a small amount of money. In most cases, crowdfunding takes place on an online platform where a business or an individual can create a campaign to raise funds.

If it is a business project, the company usually includes an overview of the business plan, details of the management, and the amount that they hope to raise. If you invest, you may get a reward (the finished product, for example) and/or some shares in the company. In some instances, you may also get your money back plus interest – this is also known as peer-to-peer lending. While there are investors who just want to support an idea (especially an innovative one), most investors do hope to make a good return on investment.

As crowdfunding allows anyone to present an idea to a large group of people, savvy business people also use the process to test out their ideas and gather insight.

Crowdfunding is also not restricted to new ideas or products – there are plenty of companies conducting a second or third round of funding to spur growth.

Then there is the humanitarian side – GoFundMe is the largest platform for this and it has helped organisers raise over US$5 billion to help someone in need.

The four common types of crowdfunding

1. Equity-based

In essence, you invest in a company and receive shares of the company in return. There are usually two types of shares on offer – with and without voting or pre-emption rights. If the company does well, your shares will increase in value and you make a good return when you sell them. However, if the company fails, you will lose your investment. Also, it must be said that the company involved may not issue shares directly to you, but to a nominee company (usually a company set-up by the platform).

2. Reward-based

A highly popular model, this will see you invest a small amount of money and receive a reward at a later stage. The size of the reward often corresponds to the amount contributed. For example, you may get an ‘e-hug’ for a £10 contribution or a finished product for a £200 contribution.

3. Donation-based

This model sees you donating money to a person, charity, community or cause without expecting any reward in return, except in knowing that your donation can help to make a difference.

4. Loan-based or peer-to-peer (P2P) lending

In this model, you lend a business some money and expect to receive the money back plus interest.

The risks of crowdfunding

• The target amount may not reach
  Every project sets a target amount and if the project cannot attract enough investors before the deadline, then those who have already invested will get their money back, but the project will not be able to move forward.
• The business may fail
  Investment is inherently risky, more so when young companies are involved. It is said that 30% of new businesses fail in the first two years of operating, so there is a good chance that you may lose your money.
• Investors may not be able to sell the shares
  If the company remains unlisted, it is not easy to find another buyer to purchase the shares.
• Dividends are unlikely
  If the company becomes profitable, it may distribute the profits to its investors in the form of dividends. However, most companies listed on crowdfunding platforms are in the early stages and they tend not to make enough to pay dividends.
• The platform may fail
  In the UK, several notable platforms have gone bust, leaving both companies and investors frustrated.
• Ideas may get stolen
  As companies get much attention on crowdfunding sites, it is highly possible that others may take the opportunity to copy and improve upon the original ideas.
• Learning curve
  In most instances, companies involved do not issue shares directly to the investors but to a nominee company (usually a company set-up by the platform). Both companies and investors not familiar with this arrangement will need to educate themselves quickly.

Can investors get tax relief?

In the UK, the government has rolled out four types of schemes to help companies raise funds and they are:

• The Enterprise Investment Scheme (EIS)
• The Seed Enterprise Investment Scheme (SEIS)
• Social Investment Tax Relief (SITR)
• Venture Capital Trust (VCT)

Among them, the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) are specially designed for small companies with a higher risk to raise fund. How it works is that investors who purchase new shares in these companies can claim tax relief. If you are interested in this, keep a lookout for companies listed on crowdfunding sites with the words EIS or SEIS-approved.

Enterprise Investment Scheme (EIS)

Under this scheme, you (the investor) make an investment that is locked for a minimum of three years to qualify for the benefit. The scheme allows you to claim up to 30% income tax relief on investments up to £1 million per tax year, and you do not have to pay Capital Gains Tax if you sell them after three years. Here is a simplified example:

• You invest £10,000 in a company and you can claim back £3,000 (30%) in income tax relief. You must submit the claim as part of your self-assessment tax return.
• After three years, if you sell your shares for £20,000, you do not have to pay Capital Gains Tax.
• In the event that the company goes bust, you can offset the losses against income.

EIS can get very complicated in practice, so it is best to call us up on 020 8108 0090 and discuss any questions you may have pertaining to EIS.

Seed Enterprise Investment Scheme (SEIS)

Similar to EIS, SEIS allows small businesses to raise fund easily by offering investors tax relief. But unlike EIS where qualified companies tend to be bigger (with less than £15 million in gross assets and less than 250 employees), SEIS is used solely by start-ups that are less than two years old, have less 25 employees and less than £200,000 in gross assets. The maximum amount a company can raise under SEIS is also limited to £150,000.

Under this scheme, the investment made is also locked for a minimum of three years. Here is a simplified example:

• You invest £1,000 in a company and you can claim back £500 (50%) in income tax relief. You must have received an SEIS3 form from the company which you have invested before you can claim tax relief through your self-assessment tax return.
• After three years, if you sell your shares for £2,000, you do not have to pay Capital Gains Tax.
• If the company goes bust, you will receive some loss relief (which is a certain percentage of your investment multiple by your tax rate).

SEIS can also become complicated quickly, so give us a call on 020 8108 0090 and let us understand your situation first before recommending how you should go about claiming your tax relief and/or loss relief.

Should you list your business on crowdfunding?

If you have tried raising fund from banks and angel investors but without much success, then it is worth getting your business listed on one of the crowdfunding sites. But before you do that, it is best to answer the obvious question – why did your application get rejected in the first place? The people who will back your business on a crowdfunding platform are investors – meaning they are more likely to part with their money if they can see a good return on investment. So perhaps it is wise to spend some time to improve your product or service and make it more appealing before you list your business. Also, rewrite your business case if necessary.

Having said that, you must consider carefully what you can offer to your investors realistically. Will it be equity-based or reward-based? Perhaps a combination of both? If it is equity-based, do you want to have two categories of shares (with and without voting or pre-emption rights)? Do you need a nominee company?

Most importantly, the temptation to offer generous perks for larger investments is ever-present, so how do you know that you have inadvertently over promised your investors? These hard questions deserve clear answers from independent small business accountants at Tax Agility, and one of our small business specialists will be delighted to help you run through some figures and answer any questions pertaining to share structure.

If you would like to know more about funding options, this article The complete guide to business funding makes a good read.

Get advice from Tax Agility

Though it has a fair share of risks, crowdfunding has connected many investors and companies. It has helped companies turn their ideas into realities and facilitate growth. It has also given individuals like you and I a chance to invest and receive tax relief.

If you are a company director who needs help with numbers before listing your business on a crowdfunding site, or if you are an investor wanting to understand how EIS and SEIS can work for you, call your local London accountants on 020 8108 0090 use our Online Enquiry Form.

If you enjoyed this, you might also like:

• Understanding dividends
• The complete guide to business funding
• Small business: 5 ways to get new customers

This post is intended to provide information of general interest about current business issues. It should not replace professional advice tailored to your specific circumstances.

by Donovan

10 things to avoid when starting a business

According to the Office for National Statistics, just 41.4% of UK businesses survive after five years (Statistical bulletin: Business demography, UK, 2015). There are many reasons why companies fail, from running out of cash to inappropriate partnerships.

Entrepreneurs know that there are many factors contributing to the success of a business, from having a secured financial foundation to exceeding market expectations.

Whether you are a developer working on the next photo app, a solicitor championing the rights of individuals or a hipster opening a new café in the heart of London, chances are you will learn something new almost every day about your business, especially in the early stage.

At Tax Agility, our small business accountants have years of experience working with entrepreneurs across London, helping them to launch and grow their business with our extensive financial knowledge. It is through this process that we see our clients encountering common pitfalls that most start-ups face, so in this article, we aim to discuss the top 10 things you should avoid when starting a business.

The 10 common start-up pitfalls

1. Failing to choose the right legal structure for your business

Before you start trading, take a moment to select and implement the right legal structure for your business. This decision can determine the success of your business and should be made with the assistance and guidance of a professional advisor like our chartered accountants here at Tax Agility or someone with equal qualifications.

The reason is obvious: if you have set-up as a sole trader and the business has experienced some difficulties, creditors can come after you directly and take your personal assets. This is because as a sole trader, you have unlimited liability for business debts, given that there is no legal distinction between private and business assets.

Another thing to consider is that not all legal structures are taxed the same. Limited companies are widely considered to be more tax-efficient in comparison to sole trading and partnerships. This is because a limited company has a lower tax rate than personal tax. The corporate tax rate is 19% for tax year 2019/20 and 17% for tax year 2020/21. In comparison, the personal tax is 20% for basic rate and it quickly goes up to 40% and 45% depending on how much you earn.

As a director of a limited company, you can also draw a low salary and choose to use dividends to form part of your income, because dividends have a lower tax than salaries and they aren’t subject to National Insurance contributions, meaning your tax obligation is reduced.

2. Ignoring flat rate VAT

Flat rate VAT is welcomed by many start-ups who have an annual turnover of less than £150,000 in the first year because it simplifies your VAT accounting process and with less work on bookkeeping, you can concentrate on growth.

Essentially, this scheme allows you to pay a fixed VAT rate to HMRC and you keep the difference between what you charge your customers versus the VAT you pay to HMRC. You can’t claim VAT on purchases, however, except for selected capital assets over £2,000. To find out more about how this scheme works, you can read our article 'Understanding the VAT Flat Rate Scheme'.

3. Failing to take advantage of tax incentives/relief such as the Annual Investment Allowance

The Annual Investment Allowance (AIA) is a form of tax relief for UK businesses, and it allows you to deduct the full value of a piece of qualifying business equipment from your profits before tax.

It is possible to claim AIA on most machinery (see this Gov.uk page for the complete list). The AIA amount has been temporarily increased to £1 million between 1 January 2019 and 31 December 2020. The aim is to help small businesses get a footing in the business world. If you would like to know more about AIA, follow this link to “Annual Investment Allowance explained: Tax relief for small businesses”.

4. Failing to factor in all costs

You may have heard of stories from entrepreneurs who hastily left a permanent role to launch a business, only to realise that they cannot sustain the operation. In the UK, it is said that most start-ups spend over £22,000 in their first year on costs to get started – this amount excludes costs that are associated with business-specific activities like marketing and fulfilment. Because costs have a direct impact on company profitability, business owners must find ways to control them.

If you would like to understand different types of cost and learn the seven useful tips that can help you to manage costs, this article “Small Business: managing rising costs” makes a good read.

5. Failing to keep on top of cash flow

The moment you start to trade, the flow of cash coming in and going out of your business becomes a natural cycle that keeps your company going. Cash flow is an indication of your company’s health, and the beauty of it is that you can plan in advance to ensure that you always have cash in hand to meet any financial obligations. This plan, widely known as cash flow forecast, looks at projected expenses and income for the next 12 months and can include various ‘what-if’ scenarios.

In this article “Five ways to improve your company’s cash flow”, we explain what cash flow is and share five useful tips that business owners can use to manage cash flow. Follow the link to have a read, especially if cash flow is keeping you awake at night.

6. Failing to use the full potential of employees

In this day and age, both new start-ups and established small companies need employees who can adapt to the ever-changing market needs and are willing to take initiatives to see things through. The problem is not many employees possess that quality. At the same time, most start-ups and business owners do not have the time to review every employee constantly, leading to a greater disparity between company goals and those who are supposed to work toward achieving the goals.

Three common ways which you can use to help employees stepping-up to the challenge are:

• Developing their decision-making abilities
• Creating a supportive work culture
• Training

Having said that, we are also realistic and must point out that not every employee can reach his or her full potential in this particular point of their career journey. If the weaker employees are causing stronger employees issues and if you are not doing something about it, chances are, the stronger employees will leave. So keep a watchful eye and make sure that your strong employees are supported and can continue to contribute positively.

7. Being wasteful

Most start-up owners would like to think that their operation is optimised, but in reality, waste and inefficiency are common in every business.

If you have bought a fleet of new vans ready to deliver goods or have splurged £200,000 on an e-Commerce site with all the latest bells and whistles before making a sale, then it is time to examine what the business can afford and create realistic growth targets.

8. Failing to outsource when the need arises

Outsourcing is one of the best ways to achieve higher efficiency without a significant commitment. Most small business owners outsource the IT and accounting functions as soon as they start trading, allowing the business to utilise experts in these areas without having to hire full-time staff.

At Tax Agility, we help entrepreneurs across London with accounting and tax-related services, so you can concentrate on running and growing your company. The areas we cover include accounting and bookkeeping, payroll, tax planning, VAT, and management consultancy. We provide these services without any hidden costs and in most instances, you only pay an affordable monthly fee.

9. Failing to network

“Opportunity knocks through relationship building.” A client told us this phrase and we love it. Networking, at its core, is not about making a temporary connection for the sake of making a sale. Instead, the focus is on building relationships. In London, there are thousands of networking groups which readily welcome new members. Start by visiting a few and seeing which one is best suitable for you. Additionally, attend trade shows and conferences to make new contacts.

Networking can be extended to online too. LinkedIn is ideal for entrepreneurs who want to create more connections. For more about networking, take a look at this article “How to grow your business: Networking”.

Bear in mind that reciprocity is key in networking. When you make a new contact, there is a potential for you to reach out to all the friends and business associates that the individual has made. Equally, you must be prepared to introduce your contacts to the individual too.

10. Not having a business mentor

Building a business from scratch is no easy task, and many entrepreneurs stay so focus that they develop tunnel vision. At this point, having a business mentor available to discuss various issues with you is highly beneficial. This mentor can be anyone who has years of experience running various companies – it could be a serial entrepreneur, a professional business coach, a turnaround specialist, or even a chartered accountant like us. This mentor should provide independent and objective advice, even though the advice may not be something that you would like to hear.

Areas that you may consider getting advice also vary and may include:

• How to take your business to the next step?
• What can you do to improve productivity and skills?
• How to access additional funding?
• What should you consider when developing a new product?
• How to expand your business overseas?

Tax Agility’s accountants for small businesses

Launching a business is taking a big step toward realising your dream. At Tax Agility, we can support you and your business in many ways that can facilitate the process of building your business.

From establishing a limited liability company, preparing your accounts, answering tax planning questions, sorting out payrolls to controlling costs, our team of expert small business accountants is with you every step along the way.

We believe that your success is also our success, which is why we take the time to understand your business first. And with us working beside you, you can focus on other elements of your business endeavour. Contact us today on 020 8108 0090 or get in touch via our Contact Page.

This article was updated on 02/10/19.

If you liked this post, you might also enjoy:

• The complete guide to business funding
• Small Business: 5 ways to get new customers
• Five ways to improve your company’s cash flow

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.

by Donovan

The complete guide to buying a small business

Buying a small business can be a great opportunity or first step into the world of business without starting from scratch, but there are a few things you need to know before you seal the deal.

Every day in the UK, there are small business owners who are ready to retire or want to change focus, giving aspiring individuals a chance to buy an established business with an existing customer base.

Buying an existing small business is a serious investment. It comes with many benefits but it is not without risk. To prepare you for the journey, the small business accountants at Tax Agility aim to discuss the following issues in this article:

• Advantages of buying a small business
• Disadvantages of buying a small business
• Assessing your strengths and requirements
• Finding a business for sale
• Valuing a business
• Conducting due diligence
• Making an offer
• Signing a contract

Advantages of buying a small business

Buying an existing small business has many benefits, particularly if it has been well-managed. In general, the benefits include:

• It is easier to secure finance when buying an established small business as lenders see less risk in existing businesses which have already generated income versus start-ups.
• An existing business tends to have a healthy customer base and strong relationships with suppliers, along with equipment, stock, a working website and even intellectual property.
• It is highly likely the existing business has staff with experience that they can share them with the new owner.
• As the business is not starting from scratch, it also means it has cash flow.

Disadvantages of buying a small business

• You will need to invest a significant sum of money to purchase an existing profitable small business. You will also need to spend on professional services including due diligence experts, lawyers and accountants.
• You will inherit any issues the business has, anything from old equipment or an outdated website to quality problems. You are likely to invest a lot more to fix these issues.
• The business situation may change, e.g the original owner might have purchased products from his family members at a discount and this situation is likely to change once you take over.

Assessing your strengths and requirements

Before you decide to buy a business, it is worth taking some time to assess your strengths and know what the business is likely to require of you. Ask yourself these questions:

• How much money are you ready to invest?
• Where will you get the money from? Our post titled "The complete guide to business funding" may make a good read.
• What are your goals?
• Do you have a preferred industry?
• Do you have a preferred business model?
• Are you mentally and physically prepared to work long hours to make the business succeed?

Finding a business for sale

Once you know that you are ready to purchase an existing small business, the next step is to visit a business broker and see what is available. Small business accountants like us may also help, as we work with businesses across London and our clients tend to let us know if they are planning to sell their business. Alternatively, you can find out from real estate agency listings, trade journals or even newspapers.

Research is key when you are looking to buy a small business. Our advice to aspiring individuals is not to take the seller’s word on everything that they say, but do your own research. Find out who their competitors are, talk to their customers and look through online reviews, talk to suppliers, research market trends, or even try out the business’s products or services.

Valuing a business

Nobody wants to overpay for a business, so it is important to find out what you are actually getting as part of the sale.

Generally, business experts value how much a business is worth based on its net worth (meaning the difference between its assets and liabilities), plus its potential to generate future earnings. In this day and age, factors such as a business’ social media reach may also be considered.

Conducting due diligence

In our opinion, due diligence is perhaps the most important process when you are ready to acquire an existing small business. Due diligence helps to give a true value of a business and identifies the associated risks.

Due diligence means you (the buyer) will investigate, test and verify the various claims made by the seller. Due diligence is done to protect the business interests of the investigating party, to ensure that claims are genuine, and to assess financial matters of the other party (such as assets, financial performances and pre-existing debts). To put it simply, due diligence is a way of ensuring that there are no nasty surprises waiting for you following the transaction.

Due diligence covers every business aspect including financial, taxes, intellectual property, licenses and permits, employees, employee benefits, environmental issues, material contracts, customer information, insurance, litigation, among others. Financial due diligence is best performed by chartered accountants, as it can cover anything from income statements, credit history, stock, to payment records.

Making an offer

If you are happy with the business and everything you have seen and reviewed thus far, it is time to make an offer. Unless the seller is desperate due to ill health or other factors, this negotiation process is likely to take a while so be patient.

Your offer should almost always be lower than the asking amount, then expect the seller to provide you with a counter-offer. Eventually, after many rounds of negotiation, you will either make an agreement by meeting at a middle ground, or either you or seller will decide not to go through with the purchase. One word of advice is, you should not get pulled past the value you can afford to pay.

Signing a contract

By now, you should have a solicitor working with you to draft up a purchase contract. It is increasingly common to include contingencies in the contract. For example, the purchase is subject to finance approval by a bank, or the contract bans the seller from opening a competing business in the same area for a period of time.

Tax Agility helps businesses get up and running in no time at all

At Tax Agility, our chartered accountants are small business specialists. We work with many small businesses in and around the London area to provide them with the expert advice they need to make good business decisions, along with accounting and tax services to keep their finances in check.

We work with small businesses at different stages of maturity from start-ups to long-established companies, including small businesses that have brand new owners in place. We provide vital consultancy services to potential buyers of small businesses – from business valuation to careful examination of financial records - to uncover any potential red flags buyers should know about before agreeing to a transaction.

After the deal is done, Tax Agility’s specialists can prepare annual business plans, provide forecasts, deliver projections and perform vital account management. We will also help sort out your tax situation, provide payroll services and offer VAT advice.

Our comprehensive service is tailored to suit the bespoke accountancy and financial needs of small business owners. To find out more about how we can help you as you look to take over a pre-existing small business, simply call us on 020 8108 0090 or use our online form to get in touch today.

This article was updated on 25/09/19.

If you liked this post, you might also enjoy:

• The complete guide to business funding
• Small Business: 5 ways to get new customers
• Five ways to improve your company’s cash flow

This post is intended to provide information of general interest about current business/ accounting issues. It should not replace professional advice tailored to your specific circumstances.

by Donovan