‘Pay per click’ is widely used by businesses across the UK. Where Google invoices another business outside the Irish Republic, they do so without VAT from their office in Dublin. However, what is not so widely known is that UK businesses may be required to account for the VAT at the UK rate (20%) through the ‘reverse charge’ legislation, which applies to most supplies of services received from suppliers based outside the UK.
VAT registered business
If you are a VAT registered business making only VATable supplies, the process is straightforward. You are treated as though you are both the supplier and the customer and include the equivalent of both the input and output VAT on your VAT return. The effect is therefore cost neutral.
If a partially exempt business receives supplies which are subject to the reverse charge, they will need to account for the full value of the output tax, but may only be able to recover at best a proportion of the corresponding input tax, depending on the result of the partial exemption calculation.
Unregistered business
If your business is not registered for VAT but you receive supplies which should be subject to the reverse charge process, then you need to add the value of those supplies to your other VATable turnover to assess whether the VAT registration threshold (currently £82,000) has been breached. If so, you would need to register for VAT with HMRC.
Even if your business makes only VAT-exempt supplies nevertheless the reverse charge supplies still count as a taxable supply for VAT purposes. If the value of the reverse charge supplies is such that the business is required to register, it will have to account for 20% VAT as output tax on the reverse charge supply, but because the business is exempt, it is unable to reclaim the corresponding input tax.
For example, an insurance broker (exempt supply for VAT) spends £100,000 on Google AdWords. The business is required to be registered for VAT due to the reverse charge legislation and they must pay over the additional 20% on its purchases subject to a reverse charge (£20,000). As the business is exempt, it is unable to include the £20,000 in its input tax claim and so Google AdWords has cost the business a total of £120,000.
What to do if you haven't treatred your supplies correctly under the reverse charge legislation
If you have not paid the correct amount of VAT, there may be penalties and interest due. If you are in this position, prompt disclosure to HMRC can help to mitigate penalties. If you are unsure about how this affects your business, please contact Julian Millinchamp in our VAT team who would be happy to advise on your business’s individual requirements. As noted above, reverse charges will affect most business to business supplies from outside the UK, not just Google AdWords.