Funding UK Projects Through Kickstarter : 5 Key Tax and Accounting Considerations

Kickstarter is a great way for UK entrepreneurs to fund their projects. In most cases, creators forward guarantee the "reward" of an item or service to the backers of their project, in return for funds received.

As of 2022, it was reported that the UK had the 2nd highest global success rate for the funding of Kickstarter projects. This is therefore an important and growing source of corporate finance both in the UK (and globally).

With this level of funding success in the UK, it's surprising that there is such little specialist tax and accounting support available for Kickstarter entrepreneurs.

In this article, we cover off 5 key accounting and tax considerations every Kickstarter creator should be aware of:

1) When to recognise Kickstarter funds received as a sale

Many Kickstarter campaigns essentially forward guarantee to the backer, the delivery of an item.

Project creators and accountants who are not experienced in handling Kickstarter campaigns, can make the common mistake of assuming that a sale occurs immediately on receipt of the funds.

Most of the time - sale of the item will be recognised in the accounts upon final delivery of the item to the backer.

In the period between receipt of the project funds and final delivery, monies received should be accounted for as "deferred income".

By misunderstanding the above, there is the strong likelihood that profits will be overstated and corporation tax overpaid for any given period.

2) Keeping track of which backers have had their rewards fulfilled

Leading on from point 1 above, it is therefore important to keep track of which orders have been fulfilled vs those which have not.

The backer report available from Kickstarter can assist with this tracking, however, depending on the size of the campaign, keeping on top of this can be extremely time consuming and challenging.

An accountant with the relevant Kickstarter experience will be able to easily handle this through the ability to automate and manipulate large data sets.

Any Kickstarter creator considering handling this themselves should think again as it can be a real time drain - time which is much better spent focussing on/developing the next project!

3) Accounting for Kickstarter and processing fees

Funds received from Kickstarter are received after Kickstarter have taken their own fees (currently 5% in the UK), as well as payment processing fees (typically 3%-5%).

When accounting for funds received, the total project funding before fees is taken, needs to be recognised in the accounts as deferred income then sales on delivery (see 1) above).

Kickstarter/processing fees are then recognised as individual expense items in the accounts. Keeping track of the ins and outs can be time consuming and tricky.

4) VAT considerations

Contributions received from backers are potentially VATable depending on whether one is required to register for VAT.

In the case of crowdfunding, a project decision on VAT registration is a complex topic and one which we will cover off in a separate article.

Assuming the project/creator is required to charge VAT on funds received, the contributions received from backers would be deemed to include VAT.

The receipt of these funds creates what is known as a "Tax point date" and as such VAT needs to be immediately accounted for and paid to HMRC accordingly.

For other types of business, the "Tax point date" would frequently occur on issue of the sales invoice (normally at despatch) for most B2C online sales.

Note - above assumes that all items are being distributed in the UK. An extra layer of complexity occurs where products are being distributed outside of the UK (since different VAT rates/rules will come into play).

5) Tax on profits generated

Where Kickstarter funds received are treated in the accounts as sales, they will be taxable under UK corporation tax rules if operating as a company/income tax rules if operating as a sole trader.

Allowable business expenses may be offset against "income" received from the campaign - e.g., designer fees, materials, Kickstarter fees etc.

If you need accounting and tax support for your Kickstarter or other crowdfunding project, please contact North Hill for a commitment free chat via the details on our contact page.