Tax Small Business Advice

Does a small business have to pay VAT on its AdWords spend?

5 Jan 2015

As a cost effective, flexible and scalable source of web traffic, AdWords has become a favoured advertising service for startups and small businesses. But are businesses in the UK required to pay VAT on their AdWords spend? Read on to find out…

Google leads the way

Launched in 2000, Google’s AdWords programme has grown to become the world’s leading online advertising service, with Google’s annual advertising revenues reaching a record $59.6 billion in 2014. During AdWords’ first decade many of its advertisers were large companies and global brands, but in 2010 Google began actively targeting small and medium-sized businesses, encouraging SMEs to use AdWords to reach local audiences.

Google’s efforts paid off, and many small businesses in the UK now use AdWords on a regular basis. However, because Google’s European headquarters are in Ireland rather than the UK, and the responsibility for assessing and paying VAT lies with the advertiser, accounting for Value Added Tax on a company’s AdWords spend can often prove a bit of a headache for small business owners.

UK VAT rate

Some goods and services benefit from a reduced VAT rate in the UK, while others have a zero rate of VAT. As a normal B2B advertising service, though, AdWords falls under the general rule and attracts the standard rate of VAT, which is currently 20% in the UK.

VAT registered

If a business is VAT registered it is able to offset the full 20% VAT liability on its AdWords spend using a ‘reverse charge’, which involves the business acting as both the supplier and the customer on its VAT return. The business charges itself 20% VAT on the AdWords spend, and then claims 20% back on the same return by recognising the spend as a taxable supply. The result is that the two VAT entries cancel each other out, and the business is not required to pay any money to HMRC for this spending.

Not VAT registered

While a business can voluntarily register for VAT at any point, it has an obligation to register and begin charging its customers VAT as soon as its taxable annual turnover exceeds £82,000.

If a business is not VAT registered then Google’s cost effective AdWords platform becomes rather less cost effective. If a business does not include a VAT ID on its AdWords account Google will charge VAT on the company’s AdWords spend at the Irish VAT rate of 23%, but unlike VAT registered businesses these smaller companies are unable to claim any of this VAT back. The net result is that smaller businesses that are not VAT registered get hit with an extra 23% cost on top of their AdWords spend.

VAT return

VAT registered businesses must keep detailed VAT records, and must file VAT returns with HMRC every three months. This can involve a great deal of paperwork and administration, but has the added advantage of allowing businesses to offset some of the VAT they collect against some of the VAT they have to pay. If your business is not currently VAT registered, but is approaching the £82,000 threshold and regularly uses Google’s AdWords service, it might be worth registering early, since registration will save your business 23% on this spending.