The internet has transformed the ability of businesses to carry out transactions across national borders. But for all the benefits this brings in terms of new opportunities and finding best value, the knock-on effects for accounting and taxation can be tricky to navigate.
One example many UK businesses are grappling with revolves around the payment of VAT on Google Adwords purchases.
Adwords, an online pay-per-click advertising service, is now one of the world’s largest and most used advertising platforms. When UK businesses buy ads from Google, they are billed from Google’s Irish headquarters in Dublin, which is of course normally outside the UK’s VAT jurisdiction.
But rather than being charged under the Irish system, VAT on AdWords is passed back to HMRC through a mechanism called Reverse Charge VAT. The reverse charge mechanism stems from a complex set of EU-wide regulations which govern the ‘place of supply’ of certain goods services sold and purchased internationally. In brief, for many electronic services, including online advertising, the place of supply is determined to be wherever the customer is based, not the supplier, AdWords purchases in the UK are still dealt with for taxation purposes by HMRC.
Self-charge and claim back
The way reverse charge is administered can seem a little confusing. For accounting purposes, the UK business purchasing from Adwords is treated as both the supplier and the customer, meaning it must issue an invoice charging itself VAT at 20 per cent for however many ads were bought.
The rationale behind this is that things like digital services have created something of a grey area in international trade law, so place of supply and reverse charge rules are aimed at plugging a gap in documentation and tax accounting. If the UK business is registered for VAT, it can claim back the VAT it charged itself on its next return, so in practice there is no actual VAT payable – it is all about keeping records in order.
VAT exemptions
Unfortunately, this system causes problems when it is applied to businesses which are VAT exempt, or partially exempt. The invoice you have to issue to yourself when you make a purchase from Adwords counts towards your total taxable income. So even if your regular earnings are below the £79,000 VAT threshold, it is possible that the value of the adverts you buy will push you above it, in which case you have to register for VAT.
As long as you stay below the VAT threshold both for real income and AdWords spend, there is no problem – the reverse charge system does not apply, and VAT does not need to be accounted for. However, if you suddenly find yourself pushed up above the threshold, there are two risks:
- You do not register for VAT as required and are penalised by HMRC.
- If you supply VAT exempt or partially exempt goods and services, you could find yourself unable to claim back the VAT you charged yourself for AdWords, adding a considerable premium to your advertising spend.
This is where businesses buying adverts from AdWords, or accessing similar electronic services abroad, are running into difficulties with the reverse charge VAT mechanism. To protect yourself, the key things to take away are as follows:
- Make sure you give Google your UK VAT number, or if you are VAT exempt, inform them you are a business. This will stop Google charging you VAT at Irish rates.
- If you are VAT registered, make sure you follow the guidelines for reverse charges carefully. If you do, you should end up with a net VAT payment of zero on your ad spend.
- If your earnings are below the VAT threshold, check that your AdWords spend does not push you over it, and make sure you register for VAT promptly if you do.
- If you supply VAT exempt goods and services, consider whether the expenditure on Google AdWords is worth the penalty you will have to pay in reverse charged VAT that you may not be able to claim back.
More information
The tax experts at Kay Johnson Gee are able to advise and guide you through the reverse charge VAT scheme for both Google Adwords and other products.
Contact them today on 0161 832 6221 or email [email protected] for more details.