28 March 2023
It has already been widely reported that HMRC has sent ‘nudge letters’ to thousands of online traders, gamers, and social media influencers that it suspects have not paid the right amount of tax on the money they have earned online.
HMRC is now also contacting 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 on the value of these gifts.
Beyond a simple business gift?
HMRC’s view is that a ‘gift’ is a voluntary and unconditional transfer of goods 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 gifts made to a single person exceeds £50 in any 12-month period. Where the total cost of goods given to the same person exceeds this £50 limit, HMRC expects the business to account for VAT on the cost price of each gift.
HMRC, however, considers that goods provided to influencers by retailers and other businesses are not a simple business gift, and therefore not covered by the normal rules for accounting for VAT on business gifts. Instead, HMRC sees the business gifting the goods as obtaining a clear commercial benefit from the influencer in the form of advertising services – either in the form of promoting the business’s brand or advertising a specific product.
HMRC takes this view even if there is no formal contract between the business and the influencer, i.e. it considers there is an implied agreement between both parties constituting a ‘barter’ transaction. In other words, HMRC sees the goods 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 account for VAT on the cost price of the gifts, HMRC values the barter transaction using the normal retail selling price of the goods that are supplied to the influencer. This significantly increases the potential VAT liability for businesses gifting goods to influencers.
HMRC has already contacted dozens of UK retailers in respect of this issue and many more businesses can expect to receive an HMRC questionnaire requesting further information on their arrangements with influencers.
In many cases, the businesses subsequently receive a VAT assessment from HMRC. While this could potentially happen to any business that provides goods 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.
The influencer may also not have considered the VAT consequences of the arrangements and may not even be VAT registered. This prevents the business that supplied the goods 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.
What can businesses do to ensure they are not caught out by HMRC?
Whilst the use of social media influencers by businesses to build their brands in exchange for free goods 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 consequences of these transactions in advance and put in place written agreements with the influencers that address both the VAT, and other potential tax consequences, of the proposed arrangements.