When you created your AdWords account, Google would have asked for your status—are you a business or an individual. Businesses would gain economic benefit from advertising, such as more revenue or new customers.
On the other hand, individuals do it for non-economic gain. The easiest rule of thumb for choosing this: are you officially registered as a business in the UK? If you are, then you’ll have to select “Business” for tax purposes.
Different account types are charged different taxes.
|Google will be charge you the Irish VAT rate of 23% for all advertising spend. Learn about which taxes apply in your contry here.||Responsible for paying assessing and paying VAT at the UK VAT rate. The standard rate is 20%.|
However, you can later reclaim this a business expense. The net effect is zero!
|No VAT ID needed.||You need to supply a VAT ID when setting up the account.*|
Don’t confuse your VAT ID with your tax number. VAT registration numbers start with a country-specific ID, followed by a maximum of 12 characters (numbers or letters.)
VAT taxes for businesses in the UK
Google does not add VAT charges to your account. Instead, you are responsible for self-assessing and paying VAT at your EU member state’s local rate (in accordance with Article 44 of EU Council Directive 2006/112/EC). In the UK, that’s 20% at the time of writing.
UK has a system called the “reverse charge system”. This means that you are both the supplier and customer of AdWords.
- You are charged yourself VAT on the goods and services provided to customers.
- At the same time, you are offsetting it as a business expense. You can then reclaim it on the same VAT return.
Here is what you should do on your business tax return. Let’s use this example: You are a UK business spending £1000 on AdWords.
- You will not be charged the Irish VAT rate of 23%.
- On your VAT return, you will have to include £200 of VAT (This is the standard 20% UK rate). You’ll include this in Box 1 of the form.
- Then, you will reclaim the £200 VAT by including it as input VAT. This is in Box 4 of the same VAT return form.
- Include the £1000 net expense in Box 6 (Net Sales) and Box 7 (Net Purchases).
This handy reverse charge system is because Google is registered as Google Ireland Ltd. Your transactions then fall under the EU rules for VAT on services supplied overseas.
However, if your business is accounting for VAT under the Flat Rate scheme, you don’t have to pay for VAT on AdWords expenditure or include it on the VAT return. This Flat Rate scheme applies to certain types of businesses, such as freelancers, consultants and people in service industries. Check with your accountant to see if this scheme applies to you.
Make sure to check with your accountant or tax professional if you are unsure about your tax liability.
Finding your VAT invoice for tax returns
All of the official billing-related documents can be found in in the “Billing” section of your account. These are not emailed to you. Instead, you can download a monthly VAT invoice from the “Transaction History” page. Simply adjust the date range that you’re looking for and download the document.
The monthly invoice document includes two kinds of information:
- Record of payments received
- Record of costs and VAT
Your invoice will show all charges that you made in that month. It does not display the click costs accrued. For example, you did not make any payments, an empty invoice is generated. All of these documents are legally valid, which means that they will be accepted by local tax authorities. No special stamp or signature is required.