Are Google AdWords costing you 20% more than you thought?
Entrepreneur Lyndon Wood on the shock Google VAT bill that could reverse the charges to you and why “exempt” doesn’t always mean “exempt”
Growing businesses have to adjust and readjust continuously in order to become profitable organisations. As part of that an online presence is invaluable.
The use of Google AdWords and the pay-per-click facility is exploited by all manner of businesses. If you’re looking for business longevity and profit then I think there’s really no alternative; it is an essential business tool.
There have been many success stories where Google AdWords has increased business revenue by 20% – but for all its merits, as a business owner, I have witnessed first-hand how even the most effective business tools can unintentionally project a falsified image of success and all in the name of VAT and the reverse charge legislation.
While utilising this service, accounts are payable to Google Dublin and VAT is not payable directly to Google for UK based businesses. However, this is where the trouble and confusion lies specifically to the UK based business sector.
For “not payable to Google” does not mean “not payable”. There may be an obligation for your business to apply the VAT on all of your Google expenditure and pay it directly to HMRC – this is ultimately a crudely simplified outline of the reverse charge legislation.
My intention as I delve deeper into this subject is not to diminish others’ success nor to discourage the use of Google AdWords. On the contrary, I believe it to be an unparalleled necessity for any business – my intention is to assist other businesses to prevent a false image of success based upon the use of Google AdWords.
The reverse charge legislation for VAT registered businesses:
If you fall under this category you are less likely to experience the pitfalls of the reverse charge legislation however I will highlight a few significances in order to differentiate between VAT exempt businesses.
- You effectively act as both the consumer and the supplier meaning you charge yourself VAT on your expenditure and reclaim it under the same VAT return.
- This often means that the VAT payable will either be nullified or reduced by the reclaimable VAT
The reverse charge legislation for VAT exempt businesses:
For businesses under this category the legislation is far more complex as it is not a necessity to be VAT registered with a VAT turnover threshold of £81,000. However reverse charge supplies count as a taxable supply for the purposes of VAT.
Exempt and partially exempt businesses normally fall under these specific sectors: insurance, finance, education, training and charitable fundraising events.
- Reverse charge supplies need to be taken into account if the business is over the tax threshold
- The VAT cost on AdWords is 20% which you are not able to claim back
- If you do not register for VAT when there is a likelihood that you breach the threshold; HMRC will impose late payment fees and demand back payments of VAT including interest
When “exempt” means “not exempt”
Many of Google’s biggest advertisers fall under the insurance sector that are, like myself, VAT exempt. It is important to understand that we would be liable to ensure that the VAT is paid on all Google purchases if the output exceeds the HMRC’s threshold of £81,000 per annum.
For example, if Google has billed you £100 – this will not yet include VAT. The UK VAT rate is currently 20% meaning that there is an additional £20 payable directly to HMRC.
It is important to remember to add the value of the AdWords expense to your annual turnover in order to determine whether or not you would be required to register for VAT.
What could happen if you fail to comply with the tax legislation:
Many constituents of your business will suffer if you have miscalculated your VAT returns. Predominantly, if you fail to account for the reverse charge of VAT then you undoubtedly have a distorted image of business success.
This essentially means that every PPC click is 20% more expensive than originally budgeted for and this could be quite a big bill if the correct VAT hasn’t been paid for a number of years. In addition to this it also means that previous business finances would have to be reviewed in order to cater for the additional 20%.
Any successful business owner appreciates the necessity of financial accuracy. My advice is always to consult with a financial expert to review your accounts and to provide guidance and assistance. This could potentially save you having to review prior business strategies and business budgeting.
In 1990, aged 19, Lyndon Wood started insurance company Moorhouse Group from his bedroom in Caerphilly. Now 43, he remains a director of the £8.6m turnover group, is CEO of ConstructaQuote and owner of business network SunZu.com.