VAT Reverse Charge On Google Adwords, Are You Getting It Right?

Google Adwords pay per click advertising is now one of the most common advertising methods used by businesses. Adwords users pay their accounts to Google in Dublin. UK based businesses will not be charged VAT when invoiced by Google. However, what most businesses don’t realise is that there may be a requirement to pay VAT to HMRC on the expenditure at the UK rate, through what is called the ‘Reverse Charge Mechanism’.

VAT Registered Businesses

If you are registered for VAT, under the Reverse Charge Mechanism you effectively act as both the supplier and the customer of the service. This means you charge yourself VAT on the value of the supply and then reclaim it on the same VAT return, giving a neutral effect overall provided your business is not partially or fully exempt from VAT.

VAT Exempt Businesses

Many businesses making exempt supplies will not be VAT registered as their taxable turnover will be under VAT registration threshold (currently £79,000). However reverse charge supplies received count as a taxable supply for VAT registration purposes and therefore the value of the reverse charge supplies need to be accounted for when considering if a business has breached the registration threshold. If for example an insurance broker who makes exempt supplies spends over £80,000 on Google Adwords per annum then they will be required to register for VAT. Once registered the broker will need to account for VAT on the Adwords costs at 20% and will not be able to claim the VAT back as they do not make taxable supplies. If the broker does not register for VAT when required then HMRC may impose late registration penalties and demand that any VAT due from the date on which the business should have been registered be paid as well. This could leave a business with a significant VAT liability along with penalties and interest.

Partially Exempt Businesses

Reverse charge supplies can also impact partially exempt businesses who may or may not be registered for VAT. If the business is not registered for VAT then, as with the VAT exempt businesses, they will need to consider if the value of the reverse charge supplies causes them to breach the VAT registration threshold. If a partially exempt business is VAT registered then care will need to be taken with the partial exemption calculation to ensure that the reverse charge supplies are being accounted for correctly in this calculation. The business will still need to pay the 20% VAT on the expenditure but may not be able to recover it all.

What should I do if I haven’t been paying the correct amount of VAT?

If you haven’t paid the correct amount of VAT or if you are unsure if the expenditure has been accounted for correctly, you should contact taylorcocks and we’ll help to review the matter and make a HMRC disclosure if required, which may reduce any penalties due. HMRC have the power to request a list of Adword users from Google and if they enquire before you make a voluntary disclosure then the penalties will be higher.

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