VAT for affiliate marketeers

I have many enquiries from affiliates who are confused as to how VAT affects their business. In particular the confusion about Adsense and Adwords. I have posted much of this information on the excellent a4uforum , but summarise it here.

VAT registration

The registration threshold is £68,000 (effective 1 April 2009) of taxable turnover for the preceeding 12 months. For VAT registration purposes, Adwords expenditure should be added onto your other turnover in calculating your taxable turnover and whether you should be VAT registered.

For example if your Adwords spend is £28,000 and commission income (from UK networks) is £40,000 then you must register for VAT.

Why is Adwords expenditure included as it is purchase and not a sale?

As you probably know, Google Adwords is invoiced from Ireland which is part of the EC and not the UK. Advertising services for VAT purposes are deemed to be supplied outside the UK and therefore under the EC reverse charge rules you are considered to be both the supplier and receiver of the services.

VAT notice 700 deals with this and the relevant sections are quoted below …

“5.4 Services received from outside the UK
If you receive from outside the UK for business purposes, any of the services listed in Section 31 [* Section 31 includes advertising services ie Adwords *], the services are treated as if you supply them, and you must account for output tax on them.

If you receive from outside the UK any of the services listed in Section 31, their value counts towards your taxable turnover. This applies even if the only supplies you make in the UK are exempt.”

This isn’t as bad as it seems. If you have registered with Adwords as a business you do not pay the VAT, if you have not registered as a business then you can easily reclaim the VAT from Google.

The reverse charge rules were designed to simplify VAT administration throughout the EC , promote cross border trading, yet still provide the statistics required for the Treasury. Therefore the deemed output VAT @ 15% of the Adwords expenditure for the quarter is shown on the VAT return and is offset by the deemed input VAT @ 15% of the Adwords expenditure which is included in the input tax on the VAT return. So being VAT registered just because the total of Adwords and sales take you over the VAT threshold will not increase the VAT payable and you will be able to reclaim VAT charged on broadband, accountancy, hosting, domains, computer equipment etc.

Our guide on how to include the reverse charge VAT on your VAT return is here .

Adsense

Adsense income is “out of the scope of UK VAT” and is excluded from the calculation of taxable supplies. However, Adsense income is still taxable under income or corporation tax, whichever is relevant for your business.

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