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It seems that the Government, in its quest to reduce the deficit, is trying to find all the additional cash it can. Over the weekend we heard that 6 million people had underpaid their tax. Then this morning, it seems in an effort to recover the situation, the radios are full of how an equal number of people might have overpaid.
However, we’ve also seen it manifest itself in an effort by revenue and customs (HMRC) to recover VAT on Google Adwords spend.
It’s a bit of a complicated situation as Adwords users pay their accounts to Google in Dublin. If the user is a business no VAT is payable to Google, but what most people don’t realise is that there is a requirement to pay VAT over to HMRC on the expenditure at the UK rate, through what is called the reverse charge legislation.
For most businesses this doesn’t have any real impact, because the cost can be offset against sales (technically there’s a reverse charge on both sales and purchases) and the two charges cancel each other out.
The big issue arises for VAT exempt businesses, which cannot put the reverse charge to their sales and are thus liable to ensure VAT is paid on their Google purchases if their spend is over the HMRC threshold of £70,000 per annum
The big thing here is that many of Google’s biggest advertisers in the insurance sector, are themselves VAT exempt. For companies that haven’t been paying their VAT correctly this could be quite a major issue, as HMRC can go right back to reclaim what should have been paid.
An insurance advertiser spending £100k per annum could be liable for almost £100k in VAT payment if they’ve not been reporting and paying correctly over the last 5 years.
This is causing a bit of a buzz as it seems many companies hadn’t realised this was the case and the government are now sending out letters trying to recover back payments.
It will be interesting to see how Google will react, as all of a sudden this means that clicks are effectively 17.5% (soon to be 20%) more expensive than they were, perhaps resulting in negative returns on investment for some more marginal campaigns.
If you manage Adwords campaigns on behalf of VAT exempt clients you should ensure they are aware of the requirement to pay VAT in the UK and that they factor the additional cost into their budgeting and campaign evaluation.