UK VAT charge could significantly increase advertising costs
UK government announced in Summer Budget 2015 that it is considering extending the VAT use and enjoyment rules to include advertising services. Such a move could impact advertising budgets for eGaming operators located outside the UK by as much as 20%. Gavin West, Director of Ampla comments on this issue and potential solutions available to affected operators.
Hidden away towards the end of the UK government’s Summer Budget 2015 policy paper, there are a couple of paragraphs on the VAT use and enjoyment provisions. Initially targeting the insurance industry, the UK states its intention next year to extend the provisions to bring into the scope of UK VAT all repairs undertaken in the UK which are made under UK insurance contracts. This change is in response to recent case law in this area.
So why does this affect eGaming operators located outside the UK but who advertise to the UK market?
It is the next sentence in the policy paper which is of interest to the gaming sector:
“In addition, the government will consider a wider review of off-shore based avoidance in VAT exempt sectors, with a view to introducing additional use and enjoyment measures for services such as advertising in the following year.”
Worst case scenario? With effect from 2017 offshore eGaming operators are hit with a 20% VAT charge on UK advertising services. This would be likely to be irrecoverable and represent an absolute cost to the business.
Whilst the comment is clearly written with a view to clamping down on tax avoidance structures, it is likely that the widening of the VAT use and enjoyment provisions would be applied to the industry as a whole. This would mean that regardless of the fact that operators are regulated, licensed and established in an offshore jurisdiction, and operate legally from there, that the new rules would be applied across the sector.
It would not be the first time within the world of VAT that we have seen rule changes implemented to restrict tax avoidance arrangements affect all businesses.
Potential scope of the issue
Clearly this will depend on the eventual wording of the legislation. However, looking at the use and enjoyment provisions in simple terms, if extended to include advertising then it could affect all eGaming operators located outside the UK who currently do not incur VAT on costs relating to UK advertising services.
The term ‘advertising services’ is wide ranging and likely to include the majority of marketing and promotional spend incurred from 3rd parties including affiliate fees, TV and media campaigns, direct mailshots, digital media etc.
It may not end there. The comment in the policy paper states “such as advertising”. Arguably it could also be extended to a much wider range of services including: assignments of licenses and IP; consultancy services; and supplies of staff. This list is by no means exhaustive.
Operators will clearly want to ensure that they are not subject to any unnecessary exposures to indirect taxes. Many are already facing increased place of consumption tax liabilities, and the extremely competitive market continues to drive down sports betting margins and threaten customer retention levels. Advertising and marketing are critical to an eGaming operation and a 20% increase in such costs could create significant issues. In the event that the rules were widened even further to include other services, the impact could be disastrous.
Experience suggests that the number of potential solutions available to operators may depend on the extent to which functions of the business are outsourced. The greater the degree of current outsourcing then a wider suite of solutions is likely to be available.
However, even where an operator’s business functions are predominately in-house this should not result in any solutions being available.
Particular focus, consideration, and attention could be applied to the following areas:
- Products offered and categories of marketing and promotion used;
- Corporate group structure and VAT registration status;
- Brand enhancement;
- Intellectual Property;
- Roles and responsibilities of affiliates;
- The nature of profit share and revenue agreements with 3rd parties across all business functions including intermediaries; and
- ‘Partnership’ or ‘joint venture’ arrangements.
There is unlikely to be a “one solution fits all” answer to this issue and each type or category of advertising may require the implementation of a different strategy. However, the general principle remains the same and where advertising, marketing and promotion services can be aligned to the commercial arrangements of the functions of the business the VAT position can often mirror this, which can in turn mitigate unnecessary exposures to VAT and unnecessary costs to the business.
Whilst each operator will need to consider their respective positions based on individual circumstances, there are likely to be a number of options available to all licensed and regulated operators established outside of the UK to mitigate the potential future effect of an increased VAT cost.
Careful consideration should also be given to future advertising and marketing strategies. The operator’s current commercial arrangements and any planned strategic changes should be taken into account. In addition it would be prudent to review other areas of material spend which could also be caught by any future change in the use and enjoyment provisions and become subject to VAT.
Before all available options can be determined, it would be necessary to fully understand the current structure of the business and the extent of commercial relationships with other entities across all of the operator’s functions. It should not matter whether the other entities are part of the wider corporate group that the operator sits within or 3rd parties. Current roles and responsibilities must also be understood through a review of review of relevant agreements.
This would allow for a phased approach, meaning that resource and time is only spent in relevant areas of the business and any review is cost effective and efficient.
|Gavin West is Director of Ampla Consulting, a company specialising in advising on VAT and other indirect taxes to the betting and gaming industry. Gavin has experience of advising all key stake holders including operators, suppliers, trade associations and regulatory bodies in the UK, the EU and other eGaming jurisdictions.
He can be contacted on +44 7976 547310 or by e-mail at firstname.lastname@example.org