Following recent representations by the Charity Tax Group (CTG), HMRC has agreed to amend its policy on the VAT treatment of online charity advertising. Information on HMRC's new policy was published on 8 September and we suggest that affected advertisers and charities should consider their position carefully.
While charity advertising is zero-rated for VAT purposes, marketing targeted towards individuals or groups has always been excluded from this relief. 'Targeted' advertising is therefore subject to VAT at the standard rate, creating significant additional costs for organisations in the not-for-profit sector.
The increase of social media marketing as a tool for communication with the public has caused conflict between charities and HMRC. HMRC argues that many social media campaigns are targeted in the context of the legislative exclusion. This conclusion is drawn on the basis that social media adverts can be and often are directed to individuals or groups based their digital footprint (for example via cookies).
New general rule
As a direct result of the CTG’s intervention, HMRC consulted with the Department for Digital, Culture, Media and Sport to understand the marketplace and terminology used in more detail and as a result it has now revised its position for charity social media campaigns.
The zero-rate relief for charity advertising remains a complex area of VAT and charities should always carefully consider the impact of HMRC’s new policy on their individual arrangements. But, broadly speaking, HMRC now takes the view that digital advertising by charities can qualify for VAT relief where the advertising process targets aggregated audiences rather than individuals. Provided all of the other conditions for zero-rating are met, examples cited by HMRC of services that may fall within the zero rate are audience or behavioural targeting (based on demographics website search history) or direct advertising on third party websites.
Charities that have seen press releases from the CTG on this topic during July and August 2020 should note that there has been one further change to HMRC’s position since those were published. Having initially excluded ‘locational targeting’ (ie the use of locational data to target audiences who have visited particular geographical areas) from the list of zero-rated advertising processes, HMRC now accepts that this can be zero-rated too.
HMRC's policy does not extend to all forms of advertising. As a result, the cost of advertisements sent to a social media address that is a ‘personal account’ or email address is subject to VAT at the standard rate. Further, the cost of generating so-called natural hits (which are generated from a search engine when a particular search term is used) will also remain subject to VAT at the standard rate. Clearly this is a difficult distinction for charities to make in the context of planning a wider advertising campaign and hence, careful consideration must be given to the various components of a campaign.
Scope for a refund
As a result of HMRC’s previous position, many charities have either been charged VAT on advertising by suppliers or applied the reverse charge to services received from outside the UK. Charities with costs in this area should revisit their past VAT accounting and consider if they may be entitled to a rebate as a result of HMRC's new position.
While welcoming HMRC’s decision to relax its policy in this area, the CTG says it continues to disagree with HMRC’s policy on social media and subscription website advertising. Overall, social and digital media advertising remains an evolving landscape which both HMRC and the charity sector are committed to keeping under review, so further changes to the VAT position are likely in the medium to long term.