Many charities are unable to reclaim the VAT they incur on their purchases and, therefore, this represents an additional cost, effectively reducing the sums available to spend on charitable purposes.
One way that the Government has, for many years, assisted in this area is to allow charities to buy in advertising (and also the means of producing adverts) at the zero rate of VAT. This VAT relief has historically been widely drawn and encompasses almost all forms of advertising, from job recruitment adverts to television and radio advertising as well as traditional newspaper and billboard adverts.
What is the VAT issue?
HMRC is currently focusing on a form of advertising that simply did not exist when VAT was introduced in the UK (1973) or when the UK’s main VAT legislation was last fully overhauled (1994), namely online advertising. In order to explain the issue HMRC has with online advertising, it may be helpful to outline the way the VAT relief works.
The law requires that an advert for a charity is placed on someone else’s space, channel, etc. and that it is ‘promulgated’. In other words, the advert must be widely available to an audience (the general public), rather than being targeted at selected individuals. A traditional billboard or newspaper advert fulfils this requirement as it is intended to be seen by a wide variety of people. Even if an advert is in a restricted periodical, perhaps a subscription-only magazine, HMRC would still accept that the advert has not been specifically targeted at selected individuals.
When advertising via the internet, some adverts are, according to HMRC, not ‘promulgated’ as the technology employed by social media and other websites effectively allows for the electronic profiling of individuals based on their IP address. This allows specific adverts to be targeted at relevant individuals (ie likely donors).
HMRC has recently confirmed that charity advertising on social media and subscription websites (where particular adverts are shown based on data held about the viewer) does not qualify for VAT zero-rating because the person reached by the advertising is ‘selected’ on behalf of the charity. This means that suppliers are likely to start to charge VAT and may seek extra funds in respect of prior adverts.
What is still accepted as being zero-rated?
The good news is that many forms of digital advertising remain zero-rated for VAT purposes, but it is clear that, unless there is a change in the law, more VAT will be due.
HMRC’s current VAT position on various types of digital advertising is understood to be as follows:
- Pay-per-click adverts - these remain zero-rated. An example would be where an advert is displayed for goods or services when users enter relevant queries into a search engine (eg Google). Advertisers are only charged when a user actually clicks on their advert link.
- Direct placements on third party websites, including when the advert is placed on a particular section on a website or alongside specific content - these remain zero-rated.
- ‘Natural hits’ (eg a hit on the charity’s website from a Google search) - these are not supplies of advertising and so the standard rate of VAT applies at 20%.
- Social media adverts - these are subject to VAT at 20% on the basis that the person reached by the advertising is selected by the software.
What should a charity do?
Although HMRC has confirmed its views in correspondence with charity representative bodies, it has not yet officially announced its position to the wider business/charity community, or confirmed whether it will be seeking to collect VAT retrospectively.
It is also unknown at this stage whether HMRC might be amenable to amending the relevant domestic VAT law if the UK leaves the EU: presently the VAT relief is restricted by EU law but the UK would be free to amend the law as it sees fit once it leaves the EU.
Communication from HMRC can be expected in due course. In the meantime, affected charities should consider taking the following actions:
- Review the previous four years expenditure on digital advertising, particularly social media.
- At the same time, review whether the charity is maximising VAT relief on eligible expenditure: this is an area where many charities overpay VAT.
- Review the contractual position with suppliers - if HMRC demanded extra VAT from digital advertising suppliers, would the charity be contractually liable to pay this, or would the contract price be treated as inclusive of any VAT due?
For help and advice on any charity VAT issue please get in touch with your usual BDO contact or Wayne Neale and Glyn Woodhouse.