So when is an advert not an advert? VAT and online introductory services. A recent technical development is that HMRC has accepted the decision of the Court of Appeal in Insurancewide/Trader Media Group that certain “clickthru” insurance introductory services are exempt from VAT. It is of course subject to certain conditions and these are listed here http://tinyurl.com/37o6cd9in R&C Brief 31/10 on the HMRC website.
At first sight this just seems like another situation where HMRC have lost the argument in some obscure technical case. But actually I think it’s much more than that.
It shows that VAT practice has to keep in line with the development of new ways of doing business on the internet and it will have implications for other exempt businesses doing business on the internet. The decision is important for the insurance industry as it means that means that insurers and other insurance businesses will no longer suffer irrecoverable VAT on these “advertising services” thus reducing their costs.
But even though this decision – and the VAT legislation concerned – applies only to the insurance industry, there are aspects that could apply to other exempt businesses, such as finance, health, education who also use “click thru” adverts as a means of finding new business.
So when is an advert not an advert?
In this case it came down to whether the clickthru service was merely a way of getting the customer to the insurers website for information purposes and thus liable to VAT, or whether it was was a mechanised introduction which could be exempt from VAT if certain criteria are met.
The interesting factor is how the use of the internet relates to the technical VAT issues. And in this case, it’s about when an advert isn’t an advert.
Remember the recent issue about internet advertising for charities? Now we all think of internet adverts as adverts – a method of telling us about a particular business which also gives us the opportunity to click onto the businesses’ website and get further information. That sounds like an advert to me and most of us wouldn’t even think twice about whether or not such services were adverts, they quite clearly are!
But it took HMRC several years to agree. And why was this? Well the main reason is that it lost them some VAT revenue from charity advertising, which is zero-rating in certain circumstances. HMRC’s position was that the online adverts weren’t adverts, but merely a mechanism for enabling people to access the website of the charity concerned and thus standard rated.
Still confused?
So when is an advert not an advert? While you’re trying to get your head around that strangely bizarre logic, you then discover that in VAT Notice 741A: The Place of Supply of Services, HMRC define advertising as including “advertising space in any electronic medium” and specifically state that “website advertising” is comes within the definition of advertising.
Why does this matter? Well it means that all of those insurance websites and other exempt businesses who can’t recover VAT have to pay VAT on such services when imported from overseas suppliers.
So on the one hand, internet advertising supplied to charities isn ‘t advertising and therefore can’t benefit from zero-rating. On teh other hand, internet advertising supplied to exempt businesses, who can’t recover VAT, is advertising and liable to VAT.
Now HMRC would probably explain this apparant non-sequitor by saying that the definitions only affect the place of supply of such services of advertising, ie in which country the VAT liability arises, but don’t actually define what is advertising.
But really it does seem to me a case of them wanting to have their cake and eat it, regardless of the impact on businesses, to find ways of enhancing VAT revenue. So I’m relieved that they have accepted the decision in Insurancewide/Trader Media Group. At last we seem to be getting some common sense about the use of the internet and how it applies to VAT issues, let’s hope it continues.