Staying on top of your Agency finances is crucial, and VAT compliance is a significant piece of that puzzle. Recently, our team had an insightful session on UK VAT regulations, and we wanted to share some key takeaways particularly relevant to agencies like yours.
With HMRC ramping up inspections due to “Making Tax Digital” and increased online access, understanding and correctly applying VAT rules is more important than ever. Here’s what you need to know:
1. Disbursements and Client Costs: A Fine Line
Understanding the difference between a genuine disbursement and a recharged cost is vital for correct VAT treatment.
- Disbursements Defined: A disbursement occurs when you pay a cost on behalf of your client, and that cost has no relation to your own supply of services. For example, if you pay a third-party legal fee (like a “Thomas Higgins fee” for credit control) and pass the exact cost to your client, it’s typically a disbursement. You don’t claim VAT on it, and you don’t charge VAT to your client.
- Client Costs (e.g., Google Ads): This is where it gets trickier for many agencies. If you manage a client’s Google Ad spend, for it to qualify as a disbursement, it must be recharged at the exact amount you paid. However, many agencies operate on a budget model, charging a fixed fee that includes ad spend. In such cases, the ad spend is usually considered part of your supply, and VAT would apply to your overall service fee. We’re actively working to standardise our approach to these costs, so always ensure clear documentation and agreements with your clients.
2. Motor Cars, Fuel, and Business Entertainment VAT
These are common areas where VAT claims can go awry.
- Motor Vehicles: You generally cannot reclaim VAT on outright purchased vehicles. However, if you lease a vehicle, you can typically reclaim 50% of the VAT.
- Fuel: VAT on fuel can be reclaimed based on HMRC’s advisory fuel rates for mileage claims. Tools are increasingly available (like Dex’s new feature) to simplify this calculation, requiring vehicle registration details to determine CO2 emissions. While the reclaim amount might seem minimal, ensuring compliance is key.
- Business Entertainment: This is a big one. You cannot reclaim VAT on business entertainment. This rule applies broadly, even to events solely for directors. If an event includes both staff and non-employees (e.g., contractors or clients), no VAT can be reclaimed on any portion of the expense. The principle is that there’s still a benefit to non-employees. The exception is reasonable entertainment for overseas clients who have travelled, provided there is no “private benefit.”
3. VAT on Overseas Customers and International Services
Digital agencies often work with international clients, making this a crucial area.
- International Services (B2C vs. B2B):
- B2C (Business to Consumer): The place of supply is generally where your customer belongs. So, if your UK-based agency provides services to a consumer in France, the place of supply is the UK, and you would typically charge UK VAT (20%).
- B2B (Business to Business): For B2B sales, the place of supply is where the customer is located. This often means the service is “outside the scope” of UK VAT, and therefore, no UK VAT is charged. Most digital agencies operate in a B2B capacity, so this often applies.
- Reverse Charge Mechanism: This mechanism ensures VAT is accounted for correctly when services are supplied internationally. For example, if you initially treat a B2B sale to an overseas customer as B2C because their VAT number wasn’t provided (and therefore charge VAT), once the VAT number is supplied, subsequent invoices should apply the reverse charge (i.e., no VAT charged by you, and the customer accounts for the VAT in their own country). It’s crucial to obtain and verify client VAT numbers for international B2B services.
4. The Importance of a VAT Checklist
To streamline VAT preparation and ensure accuracy, we’re implementing a comprehensive VAT checklist for each client. This checklist highlights “quirky” items or specific points of discussion relevant to that client’s VAT position. It requires the preparer to confirm each item has been addressed and then undergoes a reviewer’s check. This structured approach helps ensure all necessary aspects are covered consistently.
Staying Compliant
The landscape of VAT regulations is always evolving, and for digital agencies, the nuances of client costs, international services, and entertainment can be particularly complex. Proactive management and a clear understanding of these rules are essential to avoid issues during HMRC inspections.
We encourage all digital agencies to regularly review their VAT processes and seek clarification on any grey areas to ensure full compliance.
