Reverse Charge VAT: How It Works With Instagram Ads

Reverse Charge Instagram ads

Online websites such as Shopify provide an online selling platform to anyone who wants to get involved in the world of e-commerce. From experienced business owners who want to find a new platform to use to market their products, to new, small business owners who are just starting on their marketing journey. Wherever your business falls on the spectrum, you must understand some basic rules around VAT and reverse charges.

Why do you Need to Understand Reverse Charge VAT?

The first thing to consider when finding out more about reverse charge VAT is that if you are not required to be VAT registered, then reverse charge VAT will not apply to you. However, if your business VATable turnover is close to the threshold, then you should ensure you understand how reverse charge VAT works and the impact it could have on your business.

The current threshold for VATable turnover is £85,000. If your business turnover is considerably below this amount, there is little for you to worry about. However, if your business turnover is getting close, or your business is growing rapidly, then it is certainly worth understanding more about the impact of reverse charge VAT. Not understanding the rules could result in the HMRC penalising your business.

Reverse Charge VAT Instagram Ads

Instagram is one of the most popular social media platforms and a great place to get your products noticed. As a platform based on photographs or images, it is perfect for showing your target audience what you have to offer. Instagram offers a range of advertising opportunities that include Stories ads, Photo ads, Video ads, Carousel ads, Collection ads or Ads in Explore.

As the rules regarding VAT are dependent on the area in which business is located, it is important to note that Instagram is part of the Facebook and that the Facebook headquarters for anyone conducting business within the United Kingdom is in Ireland. As Ireland is not within the United Kingdom’s VAT jurisdiction, whenever you purchase Instagram Ads, you will be doing so based on a transaction between two businesses based within the EU and not two businesses based within the United Kingdom.

This means that when you choose to buy Instagram Ads VAT is not required. Unfortunately, it is not as simple as that. If your business is registered for VAT, then a reverse charge needs to be applied.

What is a Reverse Charge?

If you had been required to pay VAT at 20% on the purchase, you have made, this would be a straightforward addition to the invoice. However, because purchasing Instagram Ads constitutes a transaction between two EU registered businesses, you are not required to pay the VAT. The VAT still has to be recorded, and this is where the reverse charge arrives.

As a business, you will need to create an invoice for the 20% VAT and also a reclaim for the same amount. These need to be completed within the same quarter so that the VAT you are required to pay does not change. You will not be liable for any additional VAT because the reclaim the same amount will ensure that it creates no additional payment. However, your paperwork will show that you have applied a reverse charge, and your finances will show the necessary transactions.

Impact of Reverse Charges on your Business

If you are a medium to large business owner and registered for VAT, then you need to know that any reverse charge amount needs to be added to your VATable turnover. Whilst it doesn’t increase the amount of VAT you pay because you claim it back, it does impact your finances and needs to be recorded appropriately.

If you have a small business and are not registered for VAT, then you need to understand at what point a reverse charge might impact your business. Not understanding these rules could lead to your business being penalised by the HMRC.

If you are not registered for VAT and are not close to the threshold, then you do not need to be concerned about reverse charges. However, since a reverse charge needs to be recorded and will be added to your VATable turnover if the amount would push your turnover above the £85,000 threshold, then you will need to register for VAT. Failure to do so could result in a fine. 

How to Know When a Reverse Charge is Required

You should gain a basic understanding of the rules, so know when to expect an invoice with a reverse charge. However, if you are new to business, then you may not know this yet. When you receive an invoice simply look to see the VAT. If the VAT is zero and there is reference to Article 196, Council Directive 2006/112/EC, then a reverse charge applies.

Find out more about VAT and whether there is any VAT on Paypal or Stripe fees.

Alternatively, get in touch with us, and we can help you to understand the rules and keep your business growing!

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Ben Sztejka ACA

Ben Sztejka ACA

We are a leading e-commerce accounting firm, focused on assisting UK and EU businesses in thriving online. With expertise in Amazon FBA, Shopify, Etsy, and eBay, we provide customised tax compliance and reporting solutions. Our team combines 10 years of experience as ICAEW chartered accountants with 15 years in e-commerce, offering unparalleled support to both e-commerce businesses and accountants.

Ben Sztejka ACA

Ben Sztejka ACA

Head Accountant & Director here at Your Ecommerce Accountant. Specialises in Ecommerce Accounting drawn from his own experience in Ecommerce and selling on marketplaces like eBay, Amazon & ETSY.

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