I recently received a question about Reverse Charge on Facebook ad spend; “I have recently started advertising on Facebook & have questioned whether Facebook (FB) charges include VAT?”. Many businesses use Facebook ads to advertise their company cheaply, but what does Reverse Charge mean for your business?
Many of my clients are using Shopify or a similar platform to sell their goods. The smaller ecommerce companies who are not yet registered for VAT need to be aware of Facebook and Google Ads and its impact on the VAT registration threshold. Those who spend a high percentage of their costs on Facebook (FB) or Google Ads may be even more affected that those who focus on selling their own goods.
Is there VAT on Advertising?
There is Value added tax (VAT) on advertising, so Facebook (FB) and Google who both operate in Ireland would have to charge you VAT if you were in Ireland. However, they fall under the reverse charge directive set out by the EU. So when they invoice businesses in a different EU country then they apply EU reverse charge VAT rules.
What Is Reverse Charge VAT?
Reverse Charge VAT can be a tough concept. In a nutshell, when a business in an EU country invoices another in an EU country they don’t have to charge the EU country VAT and instead use reverse charge and show zero VAT. They will reference “Article 196, Council Directive 2006/112/EC.” On their invoice or website and it is at this point the VAT implications become your problem.
When you receive a reverse charge invoice, you, the purchaser, need to treat the service as if you both supplied and purchased the service and account for the input and output tax. In effect, this doesn’t decrease or increase your VAT liability.
Reverse Charge Services & VAT Registration
Reverse charge becomes an issue for small businesses when assessing their VATable turnover. When you receive your Facebook or google reverse charge VAT invoice, it is your responsibility to record the input and output VAT. Therefore, your Facebook and google ad spend increases your VATable turnover and therefore you need to add this spend to your current VATable turnover to assess if you breach the VAT threshold. The current VAT threshold is £85,000 and you must register within 30 days of breaching the threshold.
That means spending money on Facebook and google ads can force you into registering for VAT.
Example of Facebook and VAT threshold
Facebook is based in Ireland and is part of the EU. This means that when small businesses in the UK purchase ads from Facebook they will be not be charged VAT and will fall under the reverse charge rules.
To determine whether you have received a reverse charge invoice, go to your Facebook account, go to ad manager, click on billing and then click download as PDF. On this PDF if you see no VAT charged and a reference to Article 196, Council Directive 2006/112/EC then you will need to consider the impact on your VAT turnover and VAT threshold. See our example below:
In a space of a year, business X buys £50,000 worth of ads on Facebook and his UK revenue is £40,000, Business X would have to add £50,000 to the £40,000 meaning he had total taxable turnover of £90,000 and breach the threshold.
This means he would have to charge 20% on UK sales, either increasing the sale price to customers or taking the hit on his bottom line.
How to deal with VAT charged by EU suppliers
If you are in the UK Amazon ad spend is now UK to UK VAT and not reverse charged. Find out more about VAT and Amazon sellers.
What you need to do
You need to assess how much you spend with these and add them to your turnover.
If you are a small business and think you may have to register for VAT because of reverse charged advertising invoices please get in contact with our specialist team of ecommerce accountants for a free consultation via email or phone. (follow this link to book some time now)