How to deal with VAT on Google Adwords for Flat Rate Scheme?

Lots of us are using Google Adwords to advertise our businesses but are you treating the costs correctly for VAT purposes?

All EU businesses that use the Adwords service are billed by Google Ireland Ltd (EU). When sales are made between two businesses that are both within the EU the seller does not charge any VAT to the buyer as long as they have the buyers valid VAT registration number.

This means that you will not be charged any VAT on your Adwords bill. Does that mean there is nothing to declare on your VAT return? The answer is no.

As the government wants to keep track of sales within the EU the VAT still needs to be reported on your VAT return.


So how does this work?

A short example will be the easiest way to explain.

You receive your Adwords bills for the quarter and they ad up to £200 with no VAT charged.
The VAT on £200 would be £40 (200 x 20%). This £40 should be reported in Box 2 of your VAT return. The £40 should also be included in Box 4 of your VAT return as part of your VAT reclaimable on purchases.

This is known as the reverse charge mechanism and the net affect of this is nil so you will not end up paying any extra VAT.

Businesses that have sales that are exempt from VAT or those on the flat rate scheme will be affected differently.