Written by Dan Pelling on 6 February, 2014
There are many ways of paying for the media spend in Google AdWords pay per click advertising whether you want to pay up front, in arrears, via direct debit , credit card or bank transfer. No matter how you pay your media spend it is a business expense.
UK businesses are subject to VAT on the goods and services being provide to their customers. This VAT can be offset against certain business expenses. If like us you wondered why you were not charged VAT by Google on media spend or what you should do about VAT then read on. We wondered… researched, asked Google and our accountants and learnt the following:
As you probably know Google’s registered offices are situated in Ireland, not the UK. Although Ireland also calls its tax VAT it is different to the UK’s VAT. Ireland’s government charge 23% and the UKs Government charge 20% (February 2014).
The amount of VAT you pay depends on a few things: whether you are a business, a VAT registered business and whether you are a business registered in the UK.
If you are a business registered in the UK.
When you setup your AdWords account you are given the choice of it being a business or personal account. If you are a UK registered business then ensure you select the “Business” type of account. This tells Google you are a UK business and determines what Vat you will be charged on your AdWords media spend costs.
During the setup you will be asked to provide you VAT ID, by supplying the VAT ID it means that Google will not charge you VAT but you will be responsible for self assessing and paying VAT at the current UK rate.
When Google issues a media spend invoice there is a line under the breakdown that says the media spend is subject to the UK’s VAT ‘reverse charge system’.
The VAT recharge system simply explained is that your business effectively acts as both the supplier and the customer of AdWords and as your business is based in the UK using UK VAT rates. This means you charge yourself VAT on the invoice then also reclaim it on the same VAT return, giving a net effect of zero, so long as you are not partially exempt or exempt from VAT.
In the example of a UK business spending £1000 via Google AdWords, it means:
- You will not charged the Irish VAT of rate of 23% by Google.
- On your VAT return, you will have to include £200 of VAT in box 1 (based on the standard UK rate being 20%).
- You may then reclaim that £200 VAT by including it as input VAT in box 4 of the same VAT return
- The £1000 net expense should be added to box 6 and box 7.
For more information on the VAT recharge system please visit the HM Revenue & Customs site http://www.hmrc.gov.uk/vat/managing/international/imports/importing.htm
If your business is accounting for VAT on the Flat Rate scheme it means that your income and AdWords spend is under £150,000, you do not need to pay Flat Rate VAT on the AdWords expenditure, or include it on its VAT return so need not worry.
What if your Business is not registered for VAT in the UK or is a “personal” account
If you cannot supply a VAT number, Google will consider that your advertising campaign is being used for non-business purposes (non economic gain), and will charge you the Irish rate of VAT at 23%.
If you are a business but cannot supply a VAT ID you can avoid this happening by contacting Google and ask the account status be changed to ‘business’. This should also generate a refund from Google of any past VAT that has been incorrectly charged.
Hope this blog post helps, If you need more information the links below give more in-depth information for everything mentioned in this post.
Please note we’re not accountants and this shouldn’t be constituted as professional advice
Consult your accountant or a tax professional if you’re unsure about your VAT liability
UK VAT Information
Google’s information on VAT charges
Author: Dan Pelling
Dan is Co-Founder of Inbound360 and a search marketing expert who’s been working on search and online advertising campaigns since 2005. He has managed paid search and display campaigns on Google AdWords, Bing, LinkedIn and Facebook in diverse sectors including across finance, technology and e-commerce, leading stratagies which have generated millions in revenue for his clients.