What is the Affiliates And VAT Rule?

I receive messages from affiliates regularly who need clarification about how their business is affected by VAT. Specifically, they need to know what to consider when registering for VAT.

The VAT rules applicable to UK affiliate marketers are very complex. You need to split your commission income into several different types and track the costs of the services that businesses 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 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.) need 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 outside the UK are called "Reverse-Charge" services. Sales outside the UK VAT scope may be excluded from the calculation. One typical example is non-UK advertising commission earnings.

For example, 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). You must 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 aware, 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 suppliers wherever the customer belongs. So under the VAT reverse rules, you are deemed both the receiver and supplier of the services 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

Suppose you receive any services listed in Section 31 [including advertising services such as Adwords] for business purposes outside the UK. In that case, these services are treated as if you supplied them, and you must account for output tax on these.

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

It might appear better than it is. 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 shown on your VAT return is offset by the deemed input VAT at 20% of your Adwords pay that is included within the input tax on your VAT return.

So when you are VAT registered because 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 charged on computer equipment, domains, hosting, accountancy, broadband, etc.

However, if you are a partially exempt or VAT-exempt business, you won't be able to deduce your deemed input VAT on your VAT return, placing 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 UK VAT's scope and excluded from the taxable supplies calculation. However, Adsense income is still taxable under the corporation or income tax, whatever 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 outside the UK VAT's scope also include commissions from eBay, Amazon, and other networks based in the USA, Israel, Kuwait, Gibraltar, etc.

Commission Junction returned from Ireland to the UK in early 2016 and isis now called Conversant Europe Limited. Your income from them is UK income now for VAT purposes.