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19 May 2015

Crowd control 

Crowdfunding appears to be entering the mainstream as a source of seed and growth capital for startup businesses ranging from online publishers to coffee roasting equipment makers to computer game creators. There are fears, however, that the zealous enforcement of value-added tax rules could severely crimp the growth of this alternative form of financing.

Many crowdfunded firms grant their early backers a reward – sometimes of insignificant value, sometimes more substantial.

Ikawa, the London-based coffee roaster startup, is offering supporters through the Kickstarter crowdfunding platform tickets to coffee workshops; other incentives range from T-shirts to opera tickets or handbags.

However, the European Commission has proposed to the EU’s Value Added Tax Committee that VAT should be levied on such rewards at a rate of 20% or more. If the proposal is adopted, the extra administrative burden involved in collecting, reporting and paying the tax will likely prompt many small firms to end such incentives, which could in turn reduce their appeal to investors.

Meanwhile, the investment case behind some crowdfunding projects is coming under greater scrutiny than in the past. A new firm, All Street (itself backed by crowdfunding) claims to be the first specialist analyst for the sector, giving investors access to independent research on deals – which may not be flattering.

It’s a reminder that while crowdfunding is a new option welcomed by many investors and small businesses, it is still maturing. Investors lured by free gifts or other incentives may be more reluctant to invest without them. Especially if VAT rules make rewards uneconomic, crowdfunding projects increasingly will need to stand on their own merits.