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Understanding VAT on ads

Word of mouth, billboard advertising, SEO, partnerships. These are just a few ways to get word out there about your business. The world of advertising is a complex one, getting the right pairs of eyes to see your company's costs. In fact, in 2022, Facebook made a whopping $113.64 billion in ad revenue (they even earn more than 97.5% of all their revenue from advertising alone). 

If you’re one of those businesses that rely on Facebook and Google Ads, it’s crucial to understand the VAT (Value Added Tax) rules and regulations. In the UK, VAT directly affects online advertising budgets. The recent tax changes have modified the VAT calculation, now the government takes a 2% tax on the revenues of search engines, social media services, and online marketplaces which derive value from UK users.

In this blog, we’ll walk you through how to navigate the landscape of VAT when advertising online, all while staying compliant. You’ll also learn how to manage (and budget) these costs. 

So, what is VAT in digital advertising? 

VAT is added onto goods and services at every stage of its production and sale, which affects the pricing of online advertising and campaigns. In the UK, the standard VAT rate is 20% and applies to advertising including display ads, search engine marketing, and social media promotions. 

If you’re a business that’s registered for VAT, you can reclaim this extra incurred cost. However, for unregistered companies (or unable to reclaim VAT), it’s crucial to include this cost as part of your overall marketing and advertising budget. 

This VAT is determined by the customer’s location rather than where your company is located, which is good to keep in mind when it comes to international advertising. 

Keeping up with the VAT changes for Google and Facebook Ads

The recent VAT policy changes for Google and Facebook are reshaping the way businesses forecast and manage marketing budgets. Before the change, businesses could advertise with VAT included. However, the current policies mean businesses will now see VAT applied post-campaign, meaning a more attentive approach to budgeting for VAT expenses is required. 

Facebook provides a clear price breakdown for advertising on its platform. With this transparency comes a better understanding of staying compliant with UK tax laws. Since it’s now easier to track ad spend and VAT separately, you can better position yourself for effective financial planning. 

How does VAT affect your advertising costs and budget?

When you’re budgeting for Facebook advertising campaigns, you must factor in the tax rate to avoid any unplanned extra spending. For example, if you allocate £100 for Facebook ads, the final cost would be £120 after VAT, which could affect the total number of ads or duration you can run, unless you adjust your budget. 

How to manage VAT when advertising online 

It’s important to fully understand VAT (and stay in control of it). Here are several approaches to better ensure your campaigns run smoothly and are budget-friendly: 

  1. Adjust your budget: Work out the maths ahead of time. You may find it’s best to increase your initial budget to cover VAT, so you’re able to fully run the course of your campaign 
  2. Register for VAT: By registering for VAT, you may be able to reclaim this back on your advertising costs. This is good news when your input tax exceeds the output tax. 
  3. Claim your tax deductions: VAT-registered businesses can claim the VAT paid on advertising as input tax, effectively reducing advertising costs as long as the expenses are business-related.

  4. Create a pricing strategy: Adjust your pricing to account for VAT, helping to protect profit margins without absorbing the cost internally.

  5. Regularly review your strategy: Continuously evaluate your ad performance in relation to VAT expenses to refine your spending for better return on investment.

  6. Chat with a VAT expert: Consulting with VAT experts can uncover additional tax-saving opportunities and ensure effective management of VAT-related advertising expenses.

The lowdown on charging your customers VAT 

As an advertiser, understanding the application of VAT to the services you provide is critical. If you're VAT-registered, you're required to include VAT on all your sales invoices, which affects the final price your customers pay.

Did you know VAT registration becomes mandatory once your taxable turnover crosses the threshold within any 12-month period? However, you can also register voluntarily to reclaim VAT on business purchases.

Invoicing must clearly present the VAT charged, this ensures transparency which allows for smoother VAT reclaims on business expenses. When setting prices for your online advertising services, it’s essential to include VAT to align with  your profit margins after setting aside the collected tax.

Regulations for digital services can diverge from those for tangible goods, and for business customers, VAT is determined by their location. For consumers, it's generally based on the provider's location, with a few exceptions.

Making sure you’re using VAT-compliant accounting software helps you maintain accurate billing and better manage VAT liabilities. Keeping in the know about VAT legislation is key to adapting billing methods and avoiding non-compliance penalties. 

What digital marketers need to know about VAT compliance

Digital marketers must stay informed about VAT obligations to prevent legal issues and protect their advertising budgets. Here are some top tips to remain VAT compliant:

  1. Stay informed: Regularly check HM Revenue & Customs (HMRC) or other tax services for updates on VAT regulations.

  2. Maintain your records: Keep detailed records of all your ad expenditures and VAT charges for accurate reporting and tax credit claims.
  3. Use compliant software: Rely on accounting tools that support current VAT legislation to simplify VAT processes.

Here’s what you need to know when it comes to managing VAT in your budgets and billing:

  1. Budget for VAT: Always include VAT in your financial planning to avoid surprises on your invoice.
  2. And understand those invoices: Ensure you receive comprehensive tax invoices from platforms like Google AdWords, showing the exact VAT amounts for your records.

  3. Configure tax settings: Verify that your tax settings in advertising accounts reflect your actual VAT liabilities.

Maximising input tax credits for advertising VAT

By leveraging input tax credits, you can reclaim VAT paid on digital advertisements, such as those with Facebook and Google, which will in turn reduce your total spending.

Input tax credits are a way for VAT-registered businesses to recover VAT on purchases that are directly related to their business spending. This opportunity means you can offset the VAT you rake up on digital marketing against the VAT collected from your own sales. This approach is designed to prevent the same value from being taxed multiple times in the supply chain.

To ensure you're fully utilising your input tax credits, follow these handy steps:

1. VAT registration: Ensure your business is VAT-registered to take advantage of input tax credits.

2. Record-keeping: Keep meticulous records of all VAT payments on digital advertising, ensuring that invoices and receipts are organised for your VAT returns.

3. Timely VAT returns: Submit your VAT returns on time to reclaim input tax credits without delay and unforeseen penalties.

4. Eligibility awareness: Stay informed about which digital advertising expenses qualify for input tax credits, as these regulations are subject to change.

5. Professional Consultation: Given the complexities of VAT laws, consulting with a tax expert to maximise and validate your input tax credit claims will never go amiss. 

Understanding international VAT when advertising

Advertising your business globally makes sense, right? But understanding international VAT can be tricky business, there are more regulations to consider and they can vary from country to country. 

In Europe and the UK, it’s critical to be well-informed about the local VAT laws. For instance, the UK applies a standard VAT rate to digital marketing services, which businesses typically can reclaim as input tax. But things did get a little more confusing post-Brexit.

The EU presents a mosaic of VAT rates and regulations, with each member state controlling its VAT legislation. Advertisers may encounter reduced rates for certain types of ads or standard rates across all digital advertising services in different countries.

For advertisers promoting their products or services globally, managing VAT requires a grasp of both the tax laws in their home country and those in the markets where their ads are served. This often necessitates VAT registration in multiple countries, understanding 'place of supply' rules, and navigating the reverse charge mechanism, which reallocates the VAT reporting obligation from the supplier to the recipient.

Tax advisors specialising in international VAT can offer crucial guidance, and platforms like Google and Facebook have developed features to help comply with tax requirements globally. Keeping up-to-date with regulatory changes through authoritative sources and tax professionals is also good to keep in mind. 

Streamlining VAT processes for advertisers

Navigating VAT is essential for the success of any digital advertising campaign, particularly with the dynamic tax policies on platforms like Facebook and Google. A deep understanding of these regulations is the key to maintaining profitability when advertising online. 

Staying vigilant to VAT changes ensures compliance and also equips your business with the financial awareness to optimise ad budgets, strategically handle VAT costs, and retain a competitive stance.

With all this under your belt, seeking professional VAT advice can be the missing piece, especially when dealing with intricate tax matters. Specialists provide guidance on leveraging tax deductions, maximising input tax credits, and overcoming international VAT hurdles, all customised to the unique requirements of your operation.

As the digital marketing world and its tax mandates continually evolve, staying ahead of VAT regulations can safeguard your business against unforeseen tax burdens and enhance your overall marketing strategy. It’s a no-brainer.