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 HMRC 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 17.5% (from 1 January 2010). However you will only need to pay VAT to HMRC at 10% of the gross commission received. If you are in your first year of VAT registration, you receive a reduction of 1% on this rate until the anniversary of your VAT registration.
For example, commissions of £10,000 will have £1,750 of VAT added by the network, so you will receive £11,750 from them. The flat rate VAT is calculated as 10% of £11,750 i.e. £1,175 , a difference of £575 .
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, and Commission Junction based in Ireland, fellow members of the EC. As they are sales of advertising services to other EC member businesses, they are "out of the scope of UK VAT".
This is because 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 as these commissions are “out of the scope of UK VAT” they are 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.
Do you need to be registered for VAT?
As discussed in my guide about how to calculate your VATable supplies for VAT registration, you may need to register for VAT earlier than you previously thought. This is because the costs of advertising from non UK suppliers such as Google Adwords and Microsoft Adcenter must be included when calculating your VATable supplies for VAT registration purposes.
Once you are VAT registered, the requirement to include Google Adwords and Microsoft Adcenter in your VAT return depends upon whether you use the standard VAT scheme or the Flat Rate VAT scheme.
On the Flat Rate VAT 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.
[Guide updated 15 February 2010]
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