Crowdfunding is a quickly evolving industry with new crowdfunding platforms being launched all the time. The most popular types of crowdfunding are; Equity, Reward, Debt-based and Charitable Donor.
Potentially, any product or service could be suitable for crowdfunding but in our view, it is essential that it is genuinely innovative and therefore is capable of generating engagement from supporters. The most successful campaigns tend to be B2C products and services rather than B2B, and can evidence that the company or team behind it have a proven track record.
The cost of a crowdfunding campaign is bespoke to each client and what support is required. Advertising costs can range from £5k, Agency Costs are typically paid monthly and from £1k to £5k per month for between 1-3 months subject to what needs to be done.
We would recommend that to have a successful campaign it is important to have at least 12 weeks of preparation time before launch.
Equity:
This is a type of crowdfunding where investors put money into the organisation in exchange they receive ownership of a small amount of the business. As the business succeeds the share value is likely to increase and when they sell their share get a greater amount of money than they invested.
Reward:
Investors receive a ‘reward’ for investing money in the organisation. This can be in the form of a free gift such as a t-shirt or e-book, a discounted price on a product yet to be launched or
Debt-based:
Investors buy long-term bonds in an organisation in exchange for favourable interest rates on repayments. These are often 3 to 5 year agreements
Charitable Donor:
A donation to a community project, charity or not-for profit organisation.
We are not trained accountants or tax professionals so it is always worth seeking professional advice before undertaking any significant crowdfunding campaigns but below is our understanding of the tax implications.
Equity:
Equity investors usually hold some sort of shares in a company. These shares will often qualify for tax relief under the Enterprise Investment Scheme (EIS) (link this to: https://gov.uk/government/publications/the-enterprise-investment-scheme-introduction), or the Seed Enterprise Investment Scheme (SEIS) linked this to: https://gov.uk/guidance/seed-enterprise-investment-scheme-background).
Reward:
Reward crowdfunding is considered as a sales transaction between two parties and therefore both parties are subject to income tax or corporation tax if they exceed taxable thresholds.
Debt-based crowdfunding:
The tax implications of this sort of crowdfunding follow that of any other form of debt. The lender is taxed on the receipt of interest and the borrower, assuming it is a business, normally receives a tax deduction for the interest payable.
Charitable Donor:
Donations are made by people who invest because they believe in the cause. In return, rewards may be offered, such as acknowledgement in a rock band’s album cover, tickets to an event, regular news updates, free gifts and so on. A donation will generally not be tax deductible for the donor.
No. There are platform fees, processing fees, and VAT to consider so earmark around 10% of your total towards campaign costs.
There are a number of reasons why a crowdfunding campaign might not be successful:
- The campaign is launched before it is ready: there is a lot of work and time required in managing a fundraising campaign and without this work you are unlikely to get the traction required to get the funds you require.
- Costs are not carefully considered enough: It is important that you are offering the reward at the right price. If this is incorrect you are unlikely to get the optimum number of backers.
- Underestimating the cost of fulfilment: Backers on a crowdfunding website might be located all around the world. It is important that you take this into consideration when agreeing to dispatch the product.
- Choosing the wrong platform: The audience of each crowdfunding platform is different and there are platforms that specialise in certain aspects of crowdfunding, you should fully research each one and ensure that the audience is appropriate for your product or service.
