Flat Rate VAT For Affiliate Marketing

Using the UK flat rate VAT scheme is quite often beneficial for affiliate marketeers. Many in the affiliate marketing sector have low overheads and in particular small amounts of input tax (VAT charged on purchases).

Under the flat rate scheme, input tax is not reclaimable and the VAT paid to HMCE is calculated as a percentage of gross sales. Gross sales are net sales + the VAT charged to the networks.

Make a profit on your VAT

If you are VAT registered, the UK networks will pay you commissions together with VAT at 15% (from 1 December 2008, 17.5% prior to that date). However you will only need to pay VAT to HMCE at 8.5% of the gross commission received (9.5% prior to 1 December 2008). If you are in your first year of VAT registration, you receive a reduction of 1% on this rate.

For example, commissions of £10,000 will have £1,500 of VAT added by the network, so you will receive £11,500 from them. The flat rate VAT is calculated as 8.5% of £11,500 i.e. £977.50 , a difference of £522.50 .

The actual amount of profit depends upon the input VAT you are unable to reclaim. The input VAT is usually minimal as affiliate marketing costs are typically made up of hosting, domain names, broadband, software, PPC advertising (only Yahoo of the big 3 is currently charging UK VAT), computer consumables and telephone/mobile.

VAT on commissions from other EC Member States

Many of you will be receiving commissons from Amazon and Ebay which are based in Luxembourg, a fellow member of the EC. As they are sales to other EC member businesses, they will be treated as zero rated sales. Under normal circumstances zero rated sales are included in flat rate turnover.

However, commissions are classed as the sale of advertising services and under EU VAT law, the service is supplied where the customer belongs. The customer therefore accounts for the VAT under the Reverse Charge rules (the same rules that apply to Adwords but in reverse as you are the supplier in this situation).

You’ll be pleased to know that these commissions are “out of the scope of UK VAT” and therefore not included in the flat rate turnover.

VAT on non UK/EC commissions

Commissions received from non UK/EC networks are also “out of scope of UK VAT” and therefore are not included in your flat rate turnover. This includes Adsense.

Adwords and the flat rate scheme

As discussed in my guide Adwords and your VAT return, Adwords are classed as both a purchase and a sale for VAT purposes under the VAT rule known as the “Reverse Charge”. It is simpler than it sounds and the guide talks you through it.

Fortunately for those on the flat rate scheme, you do not have to include Adwords costs in your flat rate turnover (Section 6.4 of HMRC leaflet 733, updated March 2007).

HRBS are affiliate marketing specialists

We have a wide range of Affiliate Marketing clients and are able to pass on our expertise and experience at a reasonable fixed fee. Call Keith on 01226 379000 or contact us for a free, no obligation quotation.