Online selling is constantly growing in popularity and has become easier for sellers to set up and maintain. Websites such as Shopify make it even easier to start an online business which allows people with no business background to get involved. This is one of the major benefits of the internet and ready-made selling websites; people who have never run their own business have the opportunity to test out their creativity and entrepreneurial skills.
However, the simplicity of online selling can hide the complexities that come with running a business. One of these is VAT, and in particular, Reverse Charge VAT.
What are Microsoft Ads?
Microsoft Ads are a pay-per-click advertising service that business owners can use to drive traffic to their website in order to increase sales. If you have a small business and are selling online, Microsoft Ads can be used in a number of ways to get more customers to see your products.
By using keywords, your products can be found easier in search engines such as Bing. Your ads can appear next to or above the search results in Bing, so your ad is the first thing people see, or you can configure your ads so customers can contact you more easily.
If you want to use this powerful marketing tool to help drive customers to your products, you will have to be aware of whether your business will be liable for VAT Reverse Charges.
How Does VAT Work with Microsoft Ads?
When it comes to VAT, one of the most important factors is where your business is registered. VAT requirements are dependent on location, and with Microsoft, their Microsoft Ireland Operations Ltd. is where any UK based business will be required to deal with.
There is no requirement to charge VAT when transactions are between two businesses that are both registered within the EU. However, a reverse charge must be recorded. This is important to understand if your business is registered in the UK because Ireland does not come under the United Kingdom’s VAT jurisdiction. Therefore, EU rules come into play, and you will need to understand reverse charge VAT.
Reverse Charge VAT Microsoft Ads
Firstly, if you are not registered for VAT, then reverse charges will not apply to your business. However, if your business is registered for VAT, then reverse charges may apply. If you are new to the rules of VAT and reverse charges, then you may be wondering how you will know if a reverse charge should be applied to an invoice.
The simplest way to know is that when you receive an invoice for your advertising, there will be zero VAT and reference to ‘Article 196, Council Directive 2006/112/EC’. It is this Directive that ensures transactions between two businesses that are registered within the EU do not need to charge VAT.
What to do if a Reverse Charge Should Apply
It is only the first step to understand when a reverse charge should apply. As a ecommerce business owner, you should also have an understanding of what you need to do in situations where it does apply. As the buyer of the Microsoft Ads, a reverse charge places the responsibility on you to accurately record the VAT transactions.
A reverse charge is the amount of VAT that you would have been required to pay if your business had purchased the service in the UK. For Microsoft Ads, this would be the amount of VAT that you would have paid if the Microsoft Organisation had been registered in the UK. This cost is added to the total VAT you are required to pay the HMRC in that quarter.
The same cost is added to the amount of VAT that your business will reclaim in the same quarter. Therefore, your paperwork will show that you have supplied and purchased services and have recorded the required input and output tax.
Why are Reverse Charges Important?
As an ecommerce business owner, you will only need to be concerned about reverse charges if your VATable turnover is under, but close to, the £85,000. Due to the fact that you will need to create an invoice for the VAT charged, this will be taken into account when assessing your VATable turnover. If these charges would mean you breach the VAT threshold, then you will have 30 days in order to register your business for VAT and failure to do so could result in your business being penalised by the HMRC.
Get in touch with our tax experts today to discuss your business and ensure you comply with all the necessary VAT and reverse charge rules. We are ecommerce accountants that specialise in VAT compliance for online businesses.