*A more recent update following further exchanges with HMRC can be read here*

As highlighted previously, CTG became aware of a potential challenge by HMRC to the applicability of the VAT zero rating for advertising on third party online platforms, particularly via social media. The argument advanced is that advertising of this nature is targeted at individual browsers and thus fails to meet the zero rating criteria.

Over recent months CTG has liaised with charities and advertisers, including their technical staff, and have considered the reasons as to why this may be incorrect.  CTG met with HMRC to make this case and secured its agreement to review the issue with a view to setting clear policy objectives and communicating these to charities and suppliers.  We then submitted a detailed paper outlining the technical case for the application of zero rating to this form of charity advertising.

The HMRC official has responded and has unfortunately taken a restrictive view of the definition of ‘selection’ in respect of the zero rate criteria. The result is that they do not accept that such advertising ever qualifies for the relief.  The following is the text of their communication:

“Thank you for the time you took to meet HMRC officials, and for your very interesting paper. We appreciate the concerns of the charity sector in respect of online advertising and have taken some time to consider the issue in respect of ‘selection’.

Whilst your paper provided some very useful information, it remains HMRC’s view that where any selection takes place, such that an advert is not promulgated on a general basis, the relief cannot apply.

 As you are aware, HMRC has previously accepted that pay-per-click sponsored links which appear on search engine websites are advertisements for the purposes of Items 8 and 8A. This was confirmed in Revenue & Customs Brief 25/10, which also concluded that:

 “the listing of a charity in the results of a search engine (‘natural hits’) does not constitute the promulgation of an advertisement for the purpose of Item 8 since the charity’s name appears automatically, regardless of any action taken by or on behalf of a charity, and merely highlights text from the charity’s own website.”

However, when the relief was being extended in 2000, our general policy concluded that the word ‘addressed’ was to be interpreted widely, as with all VAT reliefs. It was therefore to cover direct mail and emails sent to ‘the occupier’ and even that addressed by inference when it is delivered to every address in a location but not individually marked. It was also expected to cover telephone calls whether or not the person receiving the call is known to the charity, even when the number is selected at random. In each case, an individual (or family) or address of some form has been specifically targeted to receive information rather than an advert being placed that may or may not reach particular members of the public.

HMRC has not changed its policy in this respect, and indeed it follows the wording of Note (10A), which refers to ‘selected’ as including “at random”.

The word “includes” is not, of course, defined in the law, so it takes its everyday meaning. The Cambridge Dictionary says that “include” means “comprise or contain as part of a whole”

 Therefore, Note (10A) says that selection can be by an address or at random. Either way, where a person receives an advert due to some form of sorting/choice, where the advert hasn’t been placed to general view, that will constitute selection for the purposes of the relief.

 In respect of digital marketing, an ‘address for electronic communications purposes’ will mean any series of letters and symbols that specifically tells you where to find something or an individual. If digital tools are used to identify a particular ‘address’ of this kind, in relation to its search history, or other options, so that an advert only goes to that ‘address’ and avoids addresses that would have no interest, that will have been selected as per Note (10A).

 We have previously advised that Note (10A) does not require a decision to be made by a human. However, any selection, regardless of the process used, will have been performed on behalf of the charity. Therefore, even if the online tools setup by a third party provider select an individual’s IP address automatically, that will still be selection by the third party on behalf of the charity.

It therefore remains HMRC’ view that where any selection takes place, such that an advert is not promulgated on a general basis, the relief cannot apply.”

CTG is continuing to work with members of The Institute of Practitioners in Advertising (IPA) and Direct Marketing Association (DMA) and hope to commission a counsel’s opinion to test HMRC’s position and, subject to the outcome of that review, to support a tribunal case to challenge any HMRC assessments or determinations that are forthcoming. We would be very interested to hear from charities which are prepared to support the costs of these legal efforts. We are hopeful that advertising agencies will also be contributing.

In the light of this feedback from HMRC it is likely that certain agencies and advertising providers will for the time being adopt the view that the relief does not apply to any advertising of this kind. Whilst that is understandable, we believe that charities should not assume that the issue is settled (as the position may be subject to a legal challenge) and should reserve their position with the supplier rather than simply accepting it. How this is achieved will depend on the relationship with the supplier. This is clearly an issue where charities will need to work closely with their professional advisors. Whilst charities and agencies will have their own positions to have regard to, we are endeavouring to ensure that this is done in as constructive a way as possible. If charities are concerned that an agency could be more constructive, it would be helpful if you could inform CTG so that we can highlight this to our industry partners.

We are not yet aware of any HMRC assessments on advertising agencies or charities, but would welcome feedback from charities on cases that emerge and the approach their agencies are taking. We would also welcome feedback from charities about the level of expenditure on online charity advertising of this type, both currently and within the last 4 years.  We would welcome any possible estimates of future expenditure on such supplies.

Alongside these efforts to challenge the correct interpretation of the existing legislation and guidance, CTG will be making a strong case to HM Treasury for a review of this VAT legislation to ensure that it keeps pace with technological developments and fundraising practice. While charities may benefit from a limited amount of additional functionality using online fundraising platforms, this is in many ways being driven by market forces and consumer demand, rather than by the charities themselves. If the intention of the legislation was to offer VAT relief on advertising by charities to raise funds and awareness – and that is our view – we believe that the law should be updated to honour this original purpose, and to reflect the fact that online charity advertising was never meant to be excluded.

Clearly, the response that we have received from HMRC is disappointing.  We would ask that this information is used sensitively as it would be unfortunate if undue publicity accelerated HMRC’s action on these issues.