Something that my AdWords clients sometimes ask me is “How do we deal with VAT on Google AdWords?”. They know I know about AdWords and they assume that because I’m a chartered accountant, I’ll know all about VAT. I have to gently tell them that my accountancy specialism was audit methodology, not indirect taxes. However, I do know how to account for VAT on your Google AdWords expenditure.
It’s not as straightforward as it might be. Here’s what you have to do…
The Google company that invoices you is Google Ireland Ltd, based in the Republic of Ireland. This is important. AdWords is an electronic service, which means that for VAT purposes, the ‘place of supply’ is deemed to be the country in which the customer is based. So if you are VAT-registered, you have to account for VAT using the ‘Reverse Charge System’.
Under the Reverse Charge System, you are effectively both customer and supplier. (If you’re thinking “Huh?”, then bear with me, you’re not alone.) Assuming you are based in the UK, you pay VAT at UK rates. If (and only if) you gave Google your VAT registration number when you set up your billing profile, then Google won’t be adding VAT to your bills. (To check if Google has your VAT number, go into AdWords, click on the ‘Billing’ button, then select ‘Billing profile’. You have to fill out an online form with Google to get this status changed.)
“So if Google isn’t adding VAT to my bill, who is?”
You are. Or at least, you should be.
Let’s assume that Google has just billed you £50. This £50 does not include any VAT yet, so you’ll have to work that out. At the time of writing, the UK VAT rate is 20%. 20% of £50 is £10. When you come to do your VAT return, add the £10 to Box 1 of your VAT return. (I’ve seen some people – including some accountants – suggesting that this should go in Box 2, not Box 1, but Box 2 is for goods, not services. The HMRC website says that Box 2 is for “goods that you buy from other EU countries, and any services directly related to those goods (such as delivery charges)”. AdWords doesn’t seem to fit that description, so you need to use Box 1.)
You’re not finished though. You also need to add the £10 to Box 4 of the VAT return as input tax. The clever among you will realise that this means that your VAT payable to HMRC has not changed. You’re absolutely right. Finally, don’t forget to add the £50 net invoice to both Box 6 (net sales) and Box 7 (net purchases).
“Isn’t that going to be really awkward in my accounting software?”
Quite possibly. Unlucky…
“What if I’m not VAT-registered?”
Ah, now that’s a little different. The Reverse Charge System does not apply if you aren’t VAT-registered. You need to make sure you’ve told Google that you are a business (again, check your Billing Profile in AdWords). If you haven’t, you won’t be able to change this yourself – you’ll need to contact Google directly to get your business status changed. Google won’t charge VAT on bills to non-Irish businesses. The only thing you need to worry about as far as VAT is concerned is that you need to add the value of the AdWords expense to your turnover when determining whether you must register for VAT.
“What if I’m not a business?”
That’s different again. If your AdWords expenditure isn’t for business purposes (or if Google thinks it isn’t – see above), then Google Ireland Ltd will levy VAT at the Irish VAT rate (21% at the time of writing) just as any retailer would. Most advertisers are deemed to be advertising for business purposes.