The zero-rate relief for charity advertising has provided significant benefits for charities since its introduction for newspaper advertising in 1986. Over the years, there have been a number of changes to the relief which have generally extended the scope to cover broadcast media and all advertising, whether it be fundraising or recruitment adverts.
However, with the advent of social media and the rise of algorithm-based advertising campaigns, HM Revenue and Customs (HMRC) has, in recent years, been challenging the availability of the zero rate. HMRC are seeking to draw a distinction between advertising, which is transmitted to the general public versus marketing, which is targeted at specific individuals or sectors.
This issue has been the subject of considerable debate between the sector, led by the Charity Tax Group, and HMRC over the last two years. Note (10A) to Group 15 of Schedule 8 of the VAT Act 1994 excludes from the relief supplies where the individuals to be reached by an advert are selected by or on behalf of the charity.
HMRC has always accepted that Pay-per-Click advertising services were eligible for the zero-rate. These adverts encourage those browsing to click on an organisation’s link in precedence to other links shown. The search engine receives a fee every time the organisation’s website is accessed through the sponsored link.
However, HMRC considered that other categories of digital advertising were caught by Note (10A):
- Audience targeting – The use of demographic, behavioural and other third-party data to identify a target audience and placing advertisements related to that data as they browse elsewhere.
- Behavioural targeting – Using cookies to identify people who have visited websites or made searches related to particular areas of interest and placing advertisements for related goods and services which are displayed as they browse elsewhere.
- Channel targeting - The selection of a specific section of a website on which to place advertisements.
- Content targeting - Selection of specific content for advertisements to appear alongside.
- Daypart targeting - Advertisers choose to target only specific times of day or specific days of the week, without any decisions involving recipients. This is because their advertisements are more relevant to those periods.
- Demographic targeting – using information entered by the user (e.g. Date of Birth) to target certain groups
- Device targeting - Advertisers choose to reach only certain types of device.
- Direct placements on third party websites - Placing an advertisement on a website without any decisions involving recipients. The choice of website is the main consideration.
- Email advertisements - Advertisements sent to email addresses are targeted at the individual recipient and are therefore excluded from zero rating.
- Location targeting - This is similar to behavioural targeting. When individuals opt in to provide location data, this information is collected and combined into large datasets to target audiences who have visited particular areas. Advertisements relating to that data are then displayed as they browse elsewhere. No personal data or survey results are collected.
- Lookalike targeting – Using cookies to identify potential new customers by looking at common traits and behaviours of existing customers.
- Natural hits - The listing of a charity in the results of a search engine. This happens automatically regardless of any action taken by or on behalf of the charity and just highlights text from the charity’s own website. Such results are not considered advertisements for VAT relief.
- Social media/subscription website accounts - When individuals log in to their personal pages, sites use tools to apply advertisements to them when they are signed in. The content will be related to the individual’s known likes, dislikes, interests or location, as a signed in member of the website.
HMRC considered that each of these categories were targeted at individuals and was not advertising to the general public. As a result, HMRC considered that each of these categories were subject to VAT at the standard rate.
As many online digital media providers, such as Facebook and Google are not based in the UK, the responsibility for accounting for the VAT due fell on the charity under the reverse charge procedures. However, for many charities, as they were accustomed to receiving advertising services zero rated, they were unaware of the responsibility to account for the reverse charge. As a result, HMRC would assess for the reverse charge which would, for most charities, not be recoverable.
HMRC wrote to the Charity Tax Group on 20 July 2020 clarifying their view of the VAT treatment of advertising services provided to charities. HMRC subsequently issued Revenue and Customs Brief 13/2020 on 8 September 2020 further clarifying the position.
HMRC now accepts that zero rating applies to the following categories of digital advertising:
|Type of Advert||VAT Rate|
|Direct Placements on Third Party Websites||0%|
However, HMRC is still of the view that as other forms of digital advertising and targeting is caught by Note (10A) and, as a result, remains standard rated. HMRC have reiterated that standard rate VAT will still apply to advertising sent direct to a social media account or e-mail inbox as this is directly targeting an individual.
The categories of online advertising that still attract VAT at the standard rate are outlined below:
|Type of Advert||VAT Rate|
|Social Media/Subscription Website Accounts||20%|
How can AAB help
AAB’s Indirect Tax team have extensive experience in supporting charities. In addition, we regularly submit claims to HMRC on behalf of our clients. Where you have incorrectly incurred VAT on eligible advertising services in the last 4 years, we can assist with the quantification and submission of a claim to HMRC to recover the VAT due to you.
Furthermore, if your advertising campaigns are based upon a location or direct targeting model, if you have not accounted for reverse charge VAT on services received from overseas suppliers, it may be necessary to submit an error correction notification to mitigate any potential penalties.
If you require further information or support on your VAT obligations, please contact Alistair Duncan, Indirect Tax Director, or your usual AAB contact.