The internet has given many people the opportunity to create small businesses by selling online. For lots of the people who have chosen to do this, they have not come from a business background and may not be aware of all the rules and regulations surrounding tax. One of these concepts is VAT and how reverse charges work. It is important to ensure you are up to date, and comply with, the law.
Buying Google AdWords
AdWords are a pay-per-click advertising service that is offered by Google. It is an incredibly powerful tool for any business who wants to grow and, if done right, can transform your business.
Unsurprisingly, Google AdWords allows advertisers such as you to reach people through the Google Search Network and through the Google Display Network. Combined, these allow your business to be found by people who are searching for words associated with your business, and banner ads to be displayed on websites you think your target audience may visit.
Whilst many people focus on the Google headquarters in America, it is important to know that when a UK business buys AdWords, they receive an invoice from Google’s Headquarters which is located in Dublin, Ireland. As Dublin is outside of the United Kingdoms’s VAT jurisdiction, EU regulations come into effect.
What is Reverse Charge VAT?
When a business from within the EU invoices another business within the EU, it is not necessary to charge VAT. Instead, a reverse charge will be used, and a zero VAT shown. This will be referenced under “Article 196, Council Directive 2006/112/EC”.
A Reverse Charge places the responsibility for recording the VAT transaction on the buyer of the goods or the service. Therefore, in the case of Google AdWords, the responsibility for recording the VAT transaction will be on you as the buyer.
When you receive an invoice that contains a reverse charge, you must act as if you have supplied and purchased the goods/services and therefore record the input and output tax. This means an invoice must be created that charges your business VAT at 20% for the Google AdWords purchased. Whilst the responsibility rests with you, this does not alter the amount of VAT that you are liable for.
Reverse Charge VAT Google AdWords
As a small business, reverse charge only becomes an issue when assessing your VATable turnover. As you will be responsible for recording the input and output tax, and you will have created an invoice that charges your business for the Google AdWords, the amount that you choose to spend on Google AdWords will increase your VATable turnover. As a result of this, you need to add this spending to your VATable turnover to be able to assess accurately whether you have breached the VAT threshold.
The current VAT threshold is £85,000. If you breach this total or know that you will breach this total, then you must register for VAT. You should keep this in mind when deciding on your Google AdWords spending as this could inadvertently push you into registering for VAT.
Impact on your Business
If your business revenue is £70,000 per year and then you opt to spend £20,000 on Google AdWords, it will be important to understand whether a reverse charge invoice has been submitted. If the invoice has zero VAT and there is a reference to Article 196, Council Directive 2006/11/2/EC, you know that the Google AdWords invoice will impact on your VATable turnover.
In this instance, you would breach the threshold and need to charge 20% on sales. You will therefore need to decide between increasing your costs to your customers or taking a hit to your profits.
If you breach the £85,000 threshold and do not register for VAT, you will be penalised by HMRC.
Taking Control of your Finances
Whatever stage your business is at, you must make sure you understand the rules around tax, including VAT, so that you can avoid being penalised further down the line. If you do not have a business background, then the financial and tax world can seem very daunting. If you have just set up your first ecommerce business or your business has started to grow, you may need to follow different rules.
It is much easier to find out everything you need to know before you take the next steps so that you keep all the necessary records and submit invoices, claims, or returns in line with the rules and regulations.
If you are a small ecommerce business owner and want to find out more about Reverse Charge VAT, get in touch today and allow us to assess whether you need to register for VAT.