Are you breaking the law by running a Crowdfunding campaign and not declaring your income?

So you run a crowdfunding campaign, get some cash in to make your film… only you don’t declare it as income. And three years later HMRC slam you for tax evasion. Slaps on the wrist, interest charges, fines both small and big… and it’s even possible there could be a custodial sentence… Seriously, if they view what you have done as pernicious fraud, and the sums are big enough, they may seek to send you to prison to wake the rest of us to the fat that CROWDFUNDING IS THE SAME AS SELLING AND THEREFORE SEEN AS TAXABLE INCOME BY HMRC.

Let me be clear.

Crowdfunding in the UK, using one of the existing platforms like InideGoGo or Kickstarter is the same as running an internet sales store.

You are selling perks. All sales are taxable income and if your entire turnover is high enough, they are also VAT attracting too.

No you cannot accept it as a donation, only a charity can do this.

No you cannot call it a loan, you have no loan agreements with you ‘contributors’ via Kickstarter / IndieGoGo.

No you cannot call it investment either, you are not offering, and cannot offer (at least via IndieGoGo and Kickstarter) shares or some quasi deal with your contributors.

It’s TAXABLE INCOME. You are SELLING PERKS.

There is no way around this that I know of.

So if you are running your film company, filing annual accounts etc., then your crowdfunding campaign is taxable income and you must declare it.

It becomes hazy when you enter the realms of community or group projects that are just making stuff for the fun.

I suspect technically, you should declare that income too, but like driving at 73mph on the motorway, you are not likely to get pulled up for it. There’s not enough in it for the tax man to come chasing. Of course, that’s not legal or accountancy advice, just a guess based on my understanding of the system.

The reality is that the major crowdfuning sites are not letting people know about this issue, and the tax man (in the UK at least), is way behind the times and hasn’t really caught up on this. I suspect that in the next 12 months there will be a high profile case and someone will get prosecuted.

So what to do to avoid that scenario?

Easy. Declare the income as sales (that’s what they are).

You are selling DVD’s, premiere tickets, digital downloads, set visits etc. (products or services) in advance. The revenue does not care when you deliver (or even fail to deliver) on this transaction, they only care about when the agreement and payment is made. So declare it along with all your other stuff.

DON’T PANIC! Remember, you can offset the cost of making your film against this income, so you should end up in a roughly tax neutral position.

If your head is spinning, go back and read that last sentence again. It’s all good so long as you declare the income.

And as one filmmaker just flagged up to me, if you are planning on running an EIS or SEIS scheme, you must NOT run a crowdfunding campaign until you are fully set up and trading as an ESI / SEIS entity. To do so would mean you had begun trading BEFOREHAND and that would invalidate your claim for EIS / SEIS status.

But what if…

When it comes to HMRC I recommend not being overly creative with any ‘what if’ scenarios. Remember, you have already agreed to lengthy terms and conditions when you signed up to IndieGoGo and Kickstarter. Did your read them? I am pretty sure they will make it clear that your tax is YOUR tax and not their problem. So you are already locked into the undeniable fact that you are running an internet sales company…

Again… But what if…

OK, so let’s change the rules and not use a major site like Kickstarter or IndieGoGo – there are WordPress plugins that allow you to run your own crowdfunding campaign from within your own site and therefore you can determine your own legal framework.

Could you offer the opportunity for people to give you a loan? Possibly, though the terms would need to be clear and a contract issued (and I am pretty sure if you throw in tickets to the premiere and a DVD that HMRC would start suggesting it’s a product or service and therefore NOT a loan). The same is true of investments.

And, you would loose the massive footfall you get from being on one of these sites, not to mention the social proof that this is not a scam.

OK… Just take a step back…

Before chucking our toys out of the pram, let’s remember the amazing opportunity here.

You get to sell your movie BEFORE it’s made. You get to use that sales money to make your film, and the costs are tax deductible. You don’t have investors to repay either. This GREAT news. We just need to run our businesses like, well, er, a business. There is no free lunch.

So get advice, work smart, work professionally and you will enjoy a smooth ride.

UPDATE – Distributer and filmmaker David Wilkinson just pointed out that if you make your film from 100% crowdfunding, which is 100% sales, then spend that money, from a tax point, you need to spread costs over the life of the film, which could be three yeras, but also means you are in profit in year one! Here’s what he said…

Assume the money is used to make a film, and also assume that you show all the expenditure on your profit and loss account. So, £100,000 is raised from equity or loans and spent in a single accounting period on a film production. The annual accounts will show no income (equity and loans are not income), and £100,000 of expenditure (=loss of £100,000). However, for TAXATION purposes, you are not allowed to claim all of the £100,000 as allowable expenditure in the first year. Instead you have to use one of the accepted methods of amortising the expenditure over the expected earnings “life” of the film. In practice this can be as little as three years, but that still means that you only have allowable expenditure of £33,000. Not a problem if income from exploitation is less than this. But NOW assume that all the £100,000 came from crowdfunding. In this case, you would have a taxable profit of £67,000 because you have taxable income of £100,000 less an allowable expenditure of only £33,000.

I will seek further accountancy advice on this. Thanks David.

Onwards and upwards!

Chris Jones
My movies www.LivingSpiritGroup.com
My Facebook www.Facebook.com/ChrisJonesFilmmaker
My Twitter @LivingSpiritPix

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Comments

  1. Jay Vaudin says:

    Good stuff. Important advice. Thanks.

    Perhaps a word on the tax implications of starting a crowdfunding campaign as an individual as opposed to a film company might be also be useful here.

  2. Chris says:

    Hi Jay, yes its simple, if you are trading – if you want to sell stuff – you are termed a sole trader in the UK, assuming you have not decalred otherwise. The bottom line is if you dont decide what you are – sole trader, partnership, Ltd Company etc – the revenue will on your behalf and tax you accordingly. Ignorance is no defence. And the term ‘film company’ makes it sound like there are big entities and little old filmmakers. A market greengrocer is as much a trading company at Tescos. Probably a different legal entity, but still a ‘produce company’ in the way that probably, just like you and I and Working title, from a tax point, may well be ‘film companies’. You should take advice from an acocuntant of course.

    I think the greay area will, at the micro budget to no budget end, will be intent. Do you intend to sell your film – have U already sold it via Crowdfunding?

  3. [...] Chris Jones talks about some of the tax implications of running a crowdfunding campaign in the UK. Though laws in other countries may differ – almost all tax collecting agencies will see crowdfunding funds as a source of income – as always check with a legal professional who knows your local laws. So you run a crowdfunding campaign, get some cash in to make your film… only you don’t declare i… [...]

  4. [...] Chris Jones on running a crowd-funding campaign and not declaring yourincome. Share this:ShareFacebookLinkedInPocketEmailPrintLike this:Like Loading… This entry was posted in The Screenplay by Adrian Bain. Bookmark the permalink. [...]

  5. Another tax issue, if you are a sole trader in your first year given above you will be taxed on the £67,000 in the second year you pay tax on account quarterley based on your previous years accounts, so in essence your tax liability for year two will be the same as year one until the end of the tax year when younfile the accounts and can then claim your tax payment back, providing you have no further income.

  6. Chris says:

    Great point Gary and another thing to keep an eye on. Of course, that tax would come out in the wash over a few years, but its a cash flow crisis for sure.
    CJ