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What is the Affiliates And VAT Rule?



I receive messages from affiliates on a regular basis who are confused about how their business is affected by VAT. Specifically, they need to know what to consider when determining whether they need to register for VAT or not.

The VAT rules that are applicable to UK affiliate marketers are very complex and you not only need to split up your commission incomes into several different types but you also have to track the costs of the services that business located outside of the UK supply to you.

For VAT purposes only, as of 1 January 2010, most business to business (B2B) services are considered to be received in the place where the customer belongs and the VAT needs to be accounted for by the customer.

VAT registration
On April 2016 the registration threshold increased from £82,000 to £83,000 of "taxable supplies" for the previous 12 months. For the purposes of VAT registration, services that are purchased outside of the UK (e.g. Facebook advertising, Google Adwords, Bing/Microsoft advertising, Twitter advertising, non UK designers, programmers, and hosting, etc.) needs to be added to your UK turnover (i.e. income) to calculate your taxable supplies and whether or not you need to be VAT registered.

Services purchased from outside of the UK are referred to as "Reverse Charge" services. Sales that are outside of the UK VAT scope may be excluded from the calculation. One common example is non-UK advertising commission earnings.

For example, if during the preceding 12 months you spent £32,000 on Reverse Charge services (Bing, Twitter, Facebook, Adwords, etc) and £51,001 is how much your commission income is (from UK networks), then you will be required to register for VAT since you have £83,001 in total "taxable supplies."

Why Reverse Charge services (Facebook, Adwords) expenditures are included even though they are not a sale and are instead a purchase

As you are probably already aware of, Facebook, Twitter, and Google Adwords advertising are invoiced from Ireland, which is not part of the UK but part of the EC. For VAT purposes, advertising services are considered to be supplier wherever the customer belongs and so under the VAT reverse rules, you are deemed to be both the receiver and supplier of the serves only for VAT purposes.

This is dealt with by VAT notice 700 and the following is from the relevant sections: 

5.4 Services that are received from outside of the UK
If you receive any services listed in Section 31 [which includes advertising services such as Adwords] for business purposes from outside of the UK, these services are treated as if you supplied them, and you are required to account for output tax on these.

If you receive any of the services that are listed in Section 31 from outside of the UK, their value is counted as part of your taxable turnover. That applies even if all of the supplies that you make within the UK are exempt.

It isn't as bad as it might appear. If you are registered as a business with Adwords you don't have to pay the VAT.

So the deemed output VAT at 20% of your Adwords spend for the quarter that is shown on your VAT return is offset by the deemed input VAT at 20% of your Adwords spend that is included within the input tax that is on your VAT return.

So when you are VAT registered due to the fact that the total sales and Adwords take you over the threshold for VAT will not increase your VAT payable and you will be able to reclaim the UK VAT that is charged on computer equipment, domains, hosting, accountancy, broadband, etc.

However, if you are partially exempt or VAT exempt business you won't be able to deduce your deemed input VAT on your VAT return which will place you in the same position as if you purchased the services from a supplier in the UK.

Adsense and other forms of income outside of the UK VAT's scope
Adsense income is outside of UK VAT's scope and is excluded from the taxable supplies calculation. However, Adsense income is still taxable under the corporation or income tax, whichever one is relevant to your business. If your business is VAT registered you must report your Amazon, Adsense, and any other EC advertising commissions on your quarterly EC Sales List to the HMRC.

Incomes that is outside of the UK VAT's scope also includes commissions from eBay, Amazon, and other networks that are based in the USA, Israel, Kuwait, Gibraltar, etc.

Commission Junction returned from Ireland to the UK in early 2016 and are called Conversant Europe Limited now. Income that you receive from them is UK income now for VAT purposes.

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