HMRC has recently clarified its position on the VAT treatment of certain types of digital advertising.

As background, under the VAT legislation, many supplies of advertising services will be VAT zero rated, meaning that when a charity purchases such supplies from an external provider, it should not be required to pay VAT. However, any supply of advertising where members of the public are “selected” (by address or at random) by or on behalf of the charity cannot fall within the zero rating and will instead be standard rated.

In the past, HMRC has taken a narrow view of what “selected” or “targeted” advertising means, and considered that various forms of advertising (which involved the targeting of aggregated audiences, and not individuals) did not qualify for the VAT zero rating.

Recently, and following several years of correspondence with the Charity Tax Group, HMRC has conceded that certain forms of digital advertising should qualify for the zero rating:

(1) retargeting (tracking a user via cookies and using those to find the person again as they browse, without using personal information);

(2) behavioural targeting (use of cookies to identify users who have been interested in a certain area and reaching them as they browse elsewhere;

(3) demographic targeting;

(4) audience targeting (use of demographic and behavioural data, and selecting IP addresses from a wide group of users based on the data); and

(5) lookalike targeting (using cookies to identify new customers based on the common behaviours of existing customers).

This is because these five types of digital advertising involve targeting aggregated audiences (not individuals), and is therefore more akin to unsolicited mail than advertising targeted at “selected” individuals.

However, any advertising which is sent to an individual’s personal email address or social media accounts or subscription website accounts, or which selects an individual based on their IP location, will still be subject to VAT at the standard rate.

This is good news for the sector, and for any charities who have been paying VAT to their advertisers, who may now be able to recover those costs from those suppliers. Charities should also be able to contact their current advertising agencies and ask them to zero rate any services which fall within the five categories above.

It is hoped that this will be an opportunity to bring the VAT legislation in line with modern developments in digital advertising, and HMRC have expressed their willingness to continue to develop their understanding of the advertising sector.

Overall, HMRC’s view is an improvement, but it needs to go further. This is a clear case of the technology on digital advertising having moved faster, and still moving faster, than the legislation. Ultimately, changes to the VAT legislation will be needed to bring the rules up to date with current developments. Further details, including the full letter from HMRC, can be seen on the CTG website: https://www.charitytaxgroup.org.uk/press-release/changes-hmrc-policy-digital-advertising-following-charity-tax/

If you would like any help or further advice on the above, then please do get in touch with Bill Lewis or Susan Shi.