September 17th, 2020 / Insight posted in Articles

VAT treatment on digital marketing supplied to charities

HMRC has issued some long awaited guidance on the VAT treatment of digital advertising supplied to charities following a period of negotiation with the various interested parties.

The good news for agencies and charities alike is that HMRC has backed away from their original position that most forms of digital advertising by charities should be standard-rated. Rather, HMRC has accepted that, although most digital advertising involves some degree of audience selection, the following types of digital advertising supplied to charities are properly zero-rated

  • Audience targeting
  • Behavioural targeting
  • Channel targeting
  • Content targeting
  • Daypart targeting
  • Demographic targeting
  • Device targeting
  • Lookalike targeting
  • Retargeting
  • Direct placements

HMRC has also reconfirmed their previous advice that pay-per-click advertising supplied to charities qualifies for the zero rate.

However, HMRC is continuing to maintain that so called natural hits and, more importantly, advertising delivered via social media or subscription websites is standard-rated. It continues to issue assessments against media companies who have omitted to charge VAT on these types of charity adverts for the last four years.

While HMRC’s decision to treat some types of digital advertising supplied to charities as zero-rated is to be welcomed, their continued insistence that social media advertising by charities should be subject to VAT will make this type of digital marketing more expensive for UK charities. HMRC’s decision to apply the policy retrospectively is in sharp contrast to the approach they took some years ago regarding the VAT treatment of direct marketing and will leave the media sector facing a large additional tax bill, plus penalties and interest charges.

While media agencies might be able to pass the costs onto charity clients, collecting these extra sums may be a challenge especially with many charities currently suffering a funding crisis. It is also unlikely that agencies will have contracts in place that allow them to pass on the cost of penalty or interest charges imposed by HMRC.

HMRC’s policy on social media adverts may well be challenged in the courts. However, in the meantime, agencies providing digital marketing to charities will need to look at their systems in some detail to ensure that VAT is being applied in accordance with HMRC’s published policy. Media companies should also look at their historic treatment of digital marketing and making the necessary disclosures to HMRC.

If you have any questions or would like further information, please get in contact with Geraint or Debbie