16 May 2023
Widening the pursuitHMRC has recently sent ‘nudge letters’ to thousands of online traders, gamers, and social media influencers that it suspects have not paid the right amount of income tax on their online earnings.
It is now turning its attention to businesses that provide free ‘gifts’ to influencers in exchange for promoting their brands and products on platforms such as Instagram, TikTok and YouTube and, in some cases, issuing VAT assessments for failing to account for VAT correctly on the value of these gifts.
More than simple business gifts
HMRC’s view is that a gift is a voluntary and unconditional transfer of goods or services where the recipient of the gift provides nothing in return. Normally gifts of goods are ignored for VAT purposes unless the total cost of all such gifts made to a single person exceeds £50 in any 12-month period. Where this threshold is breached, HMRC expects the business to account for VAT on the cost price of each gift to the person concerned. For gifts of services there is no equivalent rule, and no VAT becomes due.
However, HMRC considers that goods and services provided in this way to influencers by retailers and other businesses are not simple business gifts and, therefore, are not covered by the business gift rules. Instead, it takes the view that the business providing the goods or services obtains a commercial benefit from the influencer in the form of advertising services – either from the promotion of the business’s brand or by advertising a specific product.
HMRC takes this view even if there is no formal contract between the business and the influencer; ie it considers there is an implied agreement between both parties representing a barter transaction. In other words, HMRC views goods and/or services supplied by the business as non-monetary consideration for the provision of advertising or promotional services being provided in return by the influencer.
This means that, instead of asking businesses to apply the business gift rules and potentially only account for VAT on the cost price of any goods supplied, HMRC values the barter transaction using the normal retail selling price of the goods and/or services that are supplied to the influencer. This potentially significantly increases the VAT liability for businesses making gifts to influencers.
One-size fits all?
Marketing teams tend to use influencers to promote their business’s products through their social media platforms but will engage with those influencers in several different ways. Different arrangements may include:
- gifting a product as a gesture of goodwill, with no expectation that the influencer will promote the product;
- providing the influencer with a product within an agreement (often only informally documented) that the influencer will make a defined number of posts. This sometimes extends to the business needing to sign-off on any promotional content created by the influencer;
- using affiliated links, whereby an influencer may earn commission in return for the number of visits to a business’s website and/or visits that result in purchases; and
- cash payments to influencers acting under a formal contract, but where one or more of the business’s products is supplied to the influencer to enable them to fulfil their role, the influencer may be allowed to retain the product, although this rarely forms part of the contract.
The delineation between gifts, barter and simply consuming goods or services in the course of business is nuanced and open to debate but, in practice, HMRC’s stance appears to be that there is a general expectation of something in return for any gift to an influencer and hence the retail price of the gift forms part of the overall consideration on a barter basis.
HMRC compliance activity
HMRC has already contacted dozens of UK retailers concerning their arrangements with influencers, and many more businesses can expect to receive a HMRC questionnaire requesting further information on such activities.
In many cases, these businesses subsequently receive a VAT assessment from HMRC. While this could potentially happen to any business that provides goods or services to influencers, HMRC seems particularly focused on retailers, a sector that has been quicker than most to see the commercial benefit of having a trusted influencer with a huge social media following advertising their brand and/or products.
Influencers may also not have considered the VAT consequences of the arrangements and may not even be VAT registered. This prevents the business that made the gift(s) from passing on the VAT cost or being able to obtain VAT relief on the supply of advertising and promotional services which HMRC considers it received in return from the influencer.
Thinking about the bigger picture
Not only should businesses be thinking about the immediate VAT implications of their transactions with influencers, but they should also consider the corporate criminal offence (CCO) implications. In circumstances where an influencer requests goods or services (rather than invoiced cash payments), businesses engaging with them should take reasonable steps and have procedures in place to ensure they do not inadvertently facilitate tax evasion; for example, by an influencer seeking to convert the payments in kind they receive by way of gifts into cash (by selling them via marketplace websites etc) without including the income on their income tax return.
What can businesses do to ensure they are not caught out?
Whilst businesses using social media influencers to build their brands in exchange for free goods and services is becoming more and more prevalent, these arrangements between businesses and influencers are often surprisingly informal with very little, if any, paperwork documenting the commercial arrangements between the parties.
Businesses should therefore consider the VAT and other tax related consequences of these transactions in advance and put in place written agreements with the influencers that address the potential tax consequences of the proposed arrangements.
For more information, please get in touch with Peter Williams, Andy Beavers, Sarah Goodwin or your usual RSM contact.