Charity online advertising and VAT zero rating

We published a news item earlier this year confirming that charities have been contacted by HMRC in relation to advertising on social media.  Most advertising for charities is zero rated, however HMRC have been clarifying their interpretation on specific situations and contacting charities whom they believe may be receiving zero rating in error.

HMRC has been in dialogue recently with the Charity Tax Group and the following summarises the result of these discussions.

HMRC has confirmed that:

  • ‘Natural hits’ are not supplies of advertising for the purposes of the zero rating provision so are standard rated;
  • Pay-per-click adverts are advertisements for the purposes of the zero rating provisions as they do not involve selection by address.
  • Direct placements on third party websites are advertisements for the purposes the zero rating provision as they do not involve selection by address. They are therefore zero rated.

The key issue seems to be whether individuals are selected when they access a social media account or a subscribed website, and an advertisement is, effectively, waiting for them because that account has been preselected based on data held by them.

Zero rating for charity advertising

The VAT Act zero rates the supply of advertising to charities.  The law exists to assist with the promotion of charities to the wider public, however it states that this does not include instances where any of the members of the public (whether individuals or other persons) who are reached through a particular medium are selected by or on behalf of the charity.

For this purpose ‘selected’ includes selected by address (whether postal address or telephone number, e-mail address or other address for electronic communications purposes) or at random.

HMRC’s policy is widely interpreted and covers, for example, direct mail and e-mails sent to ‘the occupier’ and even that addressed by inference when it is delivered to every address in a location but not individually marked. It also covers all telephone calls whether or not the person receiving the call is known to the charity even when the number is selected at random. In each of these cases, therefore, an individual (or family) or address has been specifically targeted to receive information rather than an advert being placed that may or may not reach particular members of the public.

Due to the way certain social media works, content is often based on the sites using tools to apply content, including advertising, to the individual’s personal page or presence when signed in. The content is based on the individual’s likes, dislikes, interests, location, etc., associated with the address of that individual’s page, or to their presence as a signed in member of a website. HMRC consider that this is selection of a recipient by an electronic address, and not the distribution of something to a wider public and as such it should be excluded from the relief.

In HMRC’s view, the individual has not made the selection themselves, but had an advertisement targeted directly at their digital address.

 

Retargeting

HMRC also put across their view on ‘Retargeting’ which is when data collected on users when they visit a site and uses this data to reach them again. For example, a user may visit a clothing site, browse products but not purchase – this user is tracked via cookies and then those cookies can be used to find them again as they browse the internet. It is important to note here that no PII [Personally Identifiable Information] is used here, so the advertiser does not know who the individuals are, simply that that a certain device has behaved in a certain way. If you were to use a shared computer, you would likely be retargeted with items which another user has looked at, as a result of this.

As explained above, HMRC’s policy on the advertising zero rating provision holds that cases where an individual, family, or address has been specifically targeted to receive information, rather than an advert being placed that may or may not reach particular members of the public, will be caught by the condition and cannot be zero rated.

 

Practical impact

As a lot of social media providers such as Google and Facebook are based overseas, any VAT that would be due is accounted for using the reverse charge (for VAT registered charities) but crucially it counts towards the VAT registration threshold for charities that are not currently VAT registered.

The whole situation appears to be subject to debate between what charities and HMRC believe is the correct position.  In what is a recurring them in VAT, a lot has to do with the advance of technology and the capabilities of social media not being even invented when the legislation was first drafted.

A VAT case considering these very issues would assist in clarifying the law, however we are not aware at this stage of a case that is in the pipeline.

If any charity has concerns over these issues please feel free to contact our VAT team today at vat@chiene.co.uk.

Charity Commission recommends overhaul of UK charity tax system – Pt 2

In this blog series, Catriona Finnie, charity tax expert at Chiene + Tait outlines the key findings of the Charity Tax Commission report into the current charity tax system and outlines how the recommendations could impact charities in the future.

In this second part of her series, Catriona outlines the proposed changes to VAT and long term reforms under consideration.

Blog 2 – VAT and Long Term Reforms

VAT

  • The Commission recommended that a review is undertaken of the rules relating to irrecoverable VAT on charities that share their facilities, equipment or buildings with other entities, including a review of the relevant charitable purpose rules, which will be of particular benefit to research institutions.
  • Public bodies should be required to confirm the VAT status of all funding from them (by reference to guidance, which should be written in conjunction with the charitable sector). This will make it easier for charities of all sizes to access these funding arrangements as they would no longer have to incur expensive fees in order to establish the VAT treatment of arrangements.
  • A review of the VAT treatment of online advertising should also be considered, currently it is taxed differently from printed advertising. The Commission recommended that online and print advertising should have the same treatment, especially given the ongoing decline in print advertising.

 

Long Term Reforms

In addition to highlighting short term improvements, the Commission also looked at what could be done in the long term to ensure that the charity tax system is fit for purpose in the future. These recommendations are:

  • Consider whether the current tax system adequately supports new models for delivering public benefit, such as social enterprise organisations.
  • Consider whether tax breaks should be given to organisations that attract volunteers.
  • Ensure Gift Aid is compatible with the digital world.
  • The report noted that evidence suggested business rates relief provided only limited support to the smallest charities and questioned whether a property-based relief was appropriate, given the increasing online presence of most organisations and their decreasing physical presence in the high street. Should business rates relief be withdrawn, there is the potential to produce a new relief or extend existing reliefs. Note that the report did not recommend the scrapping of business rates relief.
  • Data on VAT reliefs and their impact on the charitable sector were in urgent need.  It was noted in the report that no figures for this were known and estimates only were produced.
  • If VAT is found to be a net cost for charities, the Government should consider exempting charities from VAT altogether. Conversely, if VAT is found to be a net benefit, existing VAT rules should be examined to ensure they decrease unnecessary administrative burdens for charities and remove any uncertainties in the treatment of certain items (such as funding agreements).
  • More research was also recommended in Gift Aid area in general. The report noted some alternatives to the current system which may provide more benefit to charities.

If you have a query about charity taxes, please contact Catriona at charities@chiene.co.uk or call 0131 558 5800.