Mind the tax

By | Business
It may be important for entrepreneurs to understand tax on crowdfunding.Credit@GotCredit.flickr.com

According to a recent press release from Blick Rothenberg, entrepreneurs seeking to fund their business through crowdfunding may be knowledgeable on tax arrangements if they are successful in their pitches. The London based chartered accounting company recommends new start-ups should seek to gain an understanding of how tax may be deducted from their crowdfunded total should they receive the funding they need. In this case, entrepreneurs might make an estimation of tax payable and increase their amount accordingly to fund the business or project. Crowdfunding may be a fairly new concept however many entrepreneurs may choose to raise capital to start their business this way. According to Blick Rothenberg, UK tax legislation has yet to catch up, therefore the process involved may have surprising outcomes. This includes becoming eligible for VAT depending on the turnover of the business.

Crowdfunding seems to be an alternative way of raising finance for a new venture or project by asking a large number of people each for a small amount of money. Until recently, financing a business, project or venture involved asking a few people, such as investors, for larger sums of money. This traditionally involves pitching the idea in front of potential investors with the aim of securing a large sum of investment. However, with crowdfunding, the business idea is communicated through the internet with the potential to gain many funders. Those seeking funds may set up a profile of their project on a website such as Kickstart, Justgiving, Crowdcube, Crowdfunder or Seedrs. The type of crowdfunding required may determine what website to use, such as donation/reward crowdfunding, debt crowdfunding or equity crowdfunding. The first online crowdfunded project occurred in 1997 by an American band who needed money to go on tour, and have since used this method to produce new albums. It seems crowdfunding may be the new preferred method of starting a business or project, however entrepreneurs are advised to mind the tax arrangements associated with a successful campaign.

How crowdfunding works.Credit@Rocalauraviaflicker.com

How crowdfunding works.Credit@Rocalauraviaflicker.com

The crowdfunding website Kickstarter, may be one of the largest sites for raising funds for projects. Examples of successful Kickstarter projects include the funding of a Veronica mars film following the end of the television series in 2007 and a smart watch business which generated over $20 million on the website. For those aiming to fundraise for a charity or other, perhaps the most popular websites to use are gofundme.com and justgiving.com. These are tailored to charity type fundraising and are often used when activities are arranged to raise money for a specific charity. On the official Gofundme website, the most successful fundraising campaigns include raising money for a child to undertake life-saving therapy, donations for a double amputee of the Boston Bombings event and other fundraising efforts influenced by the Boston marathon event in 2013.

Another chartered accounts firm based in Cornwall outlines the importance of entrepreneurs being aware of tax arrangements associated with crowdfunding and urges start-ups in the United Kingdom to consider the amount potentially owed in income tax, corporation tax or VAT in the future. Many crowd funding sites now offer advice for those aiming to raise funds for their business idea. Kickstarter provides information on their website on tax arrangements in various countries including the United Kingdom. According to the official United Kingdom government website, they are already supporting the growth of the crowdfunding industry through measures such as the Enterprise Investment Scheme and Seed Enterprise Investment Scheme; however are keen to explore whether additional support could help the industry to develop further. The government aims to continue to create appropriate regulatory frameworks to allow this growth in alternate finance to prosper, whilst also ensuring consumers are protected and aware of the prospects involved in investing.

How might crowdfunding be more beneficial than more traditional methods of raising capital?

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