Google Adwords and VAT Tax

VAT on Google AdWords

In Europe, Google’s advertising services are supplied by their office in the Republic of Ireland. This post explains the VAT implications to a UK business of purchasing these services, in particular payments for AdWords.
As the UK and Ireland each impose VAT under the same name, and the 2 countries have other strong links, it is a common mistake to assume that there is one single VAT regime that covers both countries, and that any VAT that is charged can be reclaimed on the UK VAT return in the usual way. This is not the case, as they are 2 separate systems of VAT, and transactions come under the EU rules for VAT on services supplied overseas.
The situation for a UK business depends on whether or not it is registered for UK VAT.

Business is NOT registered for VAT in the UK

If the business cannot supply a VAT registration number, Google might consider that the advertising is being used for non-business purposes, and charge Irish VAT at 21%. The UK business cannot reclaim this by a direct claim to the Irish tax authorities. To avoid this happening, the business should contact Google to get the account status changed to ‘business’. This should also generate a refund from Google of any past VAT that has been incorrectly charged.
The value of the AdWords expense will need to be included in the turnover of the UK business in determining whether it needs to register for VAT.

Business IS registered for VAT in the UK

In this case, a system called reverse-charging will apply. Reverse-charging is the technical name for what is intended to be a VAT simplification measure, and just means that it is the local customer, rather than Google, that accounts for the VAT.
In the example of a UK business paying £100 for AdWords, this means:

• Irish VAT at 21% will not be charged by Google.
• On its VAT return, the business will include £20 of VAT in box 1 (based on the standard UK rate being 20%).
• It may then reclaim that £20 VAT from HMRC by including it as input VAT in box 4 of the same VAT return, subject to the normal rules about recovering input tax.
• The £100 net expense should be added to box 6 and box 7.

Where the full amount of VAT can be reclaimed, there is no net cost to the UK business. Where the input VAT that can be reclaimed is restricted, for example due to the partial exemption rules, the effect of the reverse charge is to put the UK business in the same position as if it had purchased the advertising from another UK business instead of from Ireland.
If the business is accounting for VAT on the Flat Rate Scheme, it does not need to pay Flat Rate VAT on the AdWords expenditure, or include it on its VAT return.