Facebook advertising is a popular and effective way for businesses to reach new customers and promote their products or services. However, when buying Facebook ads in the UK, businesses need to consider whether reverse charge VAT rules apply.
What is reverse charge VAT?
Reverse charge VAT is a mechanism where the supplier does not charge VAT on a supply. Instead, the customer accounts for the VAT. It applies to certain services provided by overseas suppliers to UK businesses.
The purpose of the reverse charge is to prevent offshore suppliers from gaining an unfair VAT advantage when supplying digital services to UK businesses. By shifting the VAT liability to the UK business customer, the playing field is leveled.
When does reverse charge VAT apply?
The reverse charge applies when a UK business receives a service from a supplier outside of the UK or EU, and the following conditions are met:
- The customer is liable to pay UK VAT on the service
- The services are within the scope of the reverse charge
- The supplier does not have a UK VAT registration
The reverse charge applies to specific services such as consultancy, marketing, advertising, and data processing. However, some services are excluded such as financial, insurance, and educational services.
Are Facebook ads subject to reverse charge VAT?
Facebook advertising purchased from Facebook’s Ireland office is subject to the reverse charge because:
- Facebook Ireland is established outside the UK
- The service (advertising) falls under the scope of the reverse charge
- Facebook Ireland is not VAT registered in the UK
Therefore, when a UK business buys Facebook ads from Facebook Ireland, they must account for the VAT under the reverse charge mechanism rather than paying VAT to Facebook.
How does the reverse charge work for Facebook ads?
When buying Facebook ads subject to the reverse charge:
- Facebook Ireland will not charge UK VAT on its invoices
- The UK business accounts for VAT on the services as output tax
- The UK business also reclaims this same amount as input tax, subject to normal VAT recovery rules
In this way, no VAT is paid to Facebook Ireland, but the transaction is still brought within the UK VAT system.
Example
A UK company purchases €1,000 of Facebook advertising from Facebook Ireland. With the standard 20% VAT rate, the figures would be:
| Service cost: | €1,000 |
| UK VAT at 20%: | €200 |
| Total invoice: | €1,200 |
However, with the reverse charge, the VAT treatment would be:
| Service cost: | €1,000 |
| VAT to Facebook: | €0 |
| Output tax in UK accounts: | £200 |
| Input tax credit: | £200 |
| Net VAT payable: | £0 |
So the UK company must account for £200 output tax in its VAT records and can reclaim this as input tax, meaning no net VAT is paid to HMRC.
Issues and errors to avoid
When applying the reverse charge to services like Facebook ads, businesses should look out for these issues:
- Forgetting to account for output tax – This risks being penalized for errors in VAT records
- Paying non-UK suppliers VAT – This results in unnecessary VAT costs
- Not applying the reverse charge at all – This could lead to VAT non-compliance
- Double counting output tax as input tax – This leads to errors in VAT returns
Also, if a supplier later registers for VAT in the UK, normal VAT rules apply again. So businesses must watch out for this change in status.
Is Facebook ads reverse charge VAT compulsory?
Where the conditions outlined above are met, the reverse charge for Facebook ads is compulsory. UK businesses cannot choose to pay VAT to Facebook Ireland instead. Any VAT paid would not be considered deductible input tax.
However, if Facebook sets up a UK VAT registration, then normal VAT rules apply. Facebook would then charge and account for UK VAT on ads sold to UK customers.
Compliance and record-keeping
Businesses will need to ensure their accounting software and processes accommodate reverse charge VAT on Facebook ads and other affected services. They must also maintain digital records of reverse charge invoices and transactions.
On VAT returns, reverse charge output tax should be entered in Box 1, while input tax is claimed in Box 4. The net VAT payable is declared in Box 7 (after deducting allowable input tax).
Penalties
Errors in accounting for the reverse charge can lead to penalties from HMRC. This includes tax geared penalties of up to 100% of the VAT due. There are also penalties for late or missing VAT returns, as well as interest on late paid VAT.
Businesses must take reasonable care to apply VAT rules properly and ensure their tax affairs are accurate and compliant.
Conclusion
Facebook advertising purchased from Facebook Ireland is subject to reverse charge VAT in the UK. This means that UK businesses must account for the VAT on these services themselves rather than paying it to Facebook.
Complying with the reverse charge requires some adjustments to internal processes and accounting systems. But getting it right is essential as errors can be costly. Overall, understanding reverse charge VAT rules enables UK companies to import these digital marketing services VAT efficiently.
Businesses dealing with overseas suppliers should assess each supply to see if the reverse charge applies. Specialist VAT advice can also help review liabilities and ensure compliance.