Do I Pay VAT On Royalties?

[Roy Macoy]

Hello everyone.

I'm having a real hard time finding accurate information on this topic.

I made just over £150,000 in the 18/19 year from royalties. Whenever my music is used in Youtube videos, I am entitled to a percentage of the advertising revenue that those videos generate. A US company I signed up with uses technology to find any Youtube videos that contain my music. They then collect the royalties (my share of the ad revenue) from Google/Youtube on my behalf, and then pay me in US dollars.

Do I need to register and pay VAT on this income?

Thank you!

 

[TheCyclingProgrammer]

You need to establish the place of supply according to VAT rules.

If the place of supply is outside the UK then it will be outside the scope of UK VAT and therefore you would not be over the VAT registration threshold on the basis of your royalty income and no VAT would be due.

Generally a B2B supply of services to a US company would be treated as supplied where the customer belongs (the USA). Additionally certain services are treated as supplied where the customer belongs even in the case of B2C if supplied outside of the EU.

I believe your royalties would fall under one of the above rules putting it outside the scope of U.K. VAT. I’m basing this on section 12 of the place of supply document (particularly 12.3) https://www.gov.uk/guidance/vat-place-of-supply-of-services-notice-741a which would apply if it’s a B2C supply.

If it’s a B2B supply then I believe it would be covered by the general rule for services.

IANAA and given the amount stated and the potential for a hefty VAT bill if you get it wrong it might be worth paying for professional advice to be sure.

 

[Roy Macoy]

Thank you very much for the reply.

Sorry, I am unfamiliar with the term "place of supply". The company that pay me are technically not even the customers in this situation - they are just collecting royalties on my behalf. So, I guess the customers would be each individual person who uses one of my songs in their Youtube video? If that is the case, then there is absolutely no way of finding out the geographical location where each individual video was uploaded from. Or maybe the customer would just be Youtube itself?

Apologies if I misunderstood what you were saying. I am merely a musician and quite out of my depth here!

I have reached out to 3 different accountants so far. I've been given contradictory advice from them and none of them seemed to be 100% sure in what they were telling me. It's not easy as I thought it would be to find somebody who knows what they're doing! I am still currently trying to find a specialist in this area, but in the meantime I'm trying to educate myself as much as possible!

 

[TheCyclingProgrammer]

You need to speak to a VAT specialist. You also need to look at your contractual agreement with the company collecting the royalties for you to determine who the customer is but I’m doubtful it’s each individual. It might be YouTube with the company acting as your agent.

The place of supply is where the supply is deemed to have taken place.

 

[UK Contractor Accountant]

What you must look at for the purpose of the royalties is who is your customer, is it the US agent, or is it the end user? I'd hazard a guess and say that for this purpose it would be the end user as the agent is solely acting on your behalf and isn't really benefiting from the supply, unless they are buying in and selling on?

As such, you'd need to establish who the end users are, for example:

If they're in the UK, then UK VAT applicable
If they're in the EC, then UK VAT is not applicable where the customer is EC VAT registered, or have received the supply for business purposes
If they're outside the EC, then the supply is outside the scope of UK VAT

As above I would take a look at your agreement with the US company and see whether they are acting as your agent, or whether they take "ownership" and then sell on.

My opinion is that YouTube is your customer which is based (Google) Ireland looking at the service agreements on the YouTube GB site.

 

[Roy Macoy]

Thank you both for replying. I reached out to several VAT specialists last evening and two of them got back to me today. Both with a quote of £500 + VAT! I'm going to have a think about it all over the weekend, but I'll probably end up paying one of them to look into it for me just for the peace of mind.

One of them mentioned in an email that my income is "taxable turnover subject to reverse charge". I have since looked into reverse charges, primarily in relationship to Adsense.

I was wondering if any of you could answer this question... Say you make a total income of £100,000 from Google Adsense in one year. This income is apparently "Subject to the reverse charge mechanism", which means you would not pay VAT on this income in the UK. But would you still need to register for VAT because your total income is over the £85,000 threshold? And what would happen if you did not register? Would you end up having to pay VAT on that income, because you did not register for VAT and list it as a reverse charge?

 

[TheCyclingProgrammer]

The VAT reverse charge on services is used when a supply is made between two EU businesses where the supply is outside the scope of VAT in the suppliers country because the place of supply is deemed to be where the customer belongs (as is the general rule for a B2B supply of services).

This means the customer, rather than the supplier, accounts for VAT as if they had both made and received the supply. If the customer is not VAT registered because they are below their countries VAT registration threshold then the value of the supply will count towards their own turnover for the purposes of the registration threshold.

Example 1: a U.K. company supplies a service to an Irish business and the place of supply is determined to be Ireland as the service falls under the general place of supply rule. The Irish business is VAT registered in Ireland. The supply is outside the scope of U.K. VAT and the reverse charge applies. This means the Irish business will account for VAT and report the supply on their own VAT return as both a sale and purchase.

Example 2: a U.K. VAT registered business purchases online advertising from an Irish company. This supply is subject to the reverse charge as the place of supply is the U.K. As in example 1, the customer (the U.K. business) accounts for the purchase on their VAT return.

Example 3: as above but the U.K. business is not VAT registered. As they do not have a VAT number (lots of EU businesses will typically want this before they treat the supply as B2B) they provide the supplier with alternative evidence of their business status and the supplier agrees to treat the supply as B2B and again the reverse charge applies. The U.K. business has nothing to report as they are not VAT registered but they must add the value of the purchase to their turnover when assessing if they have reached the VAT registration threshold.

Hopefully that makes it clear how the reverse charge works.

As an EU based business the reverse charge applies to anything you purchase from an overseas business (including non-EU businesses) where the place of supply is deemed to be where the customer belongs. If you are *supplying* a service then the reverse charge is only applicable if the place of supply is another EU country.

It’s not clear how exactly this relevant to you. It doesn’t apply to your royalty income as this is a supply to a US-based business.

If you are also receiving income from Google Adsense who I presume are based in Ireland then again the reverse charge is of now relevance to you as you are effectively the supplier - the supply may be subject to the reverse charge in Ireland but all that means is that Google should be accounting for VAT at their end, not you. As this income is outside the scope of U.K. VAT it does not count towards your turnover for the purposes of the VAT registration threshold.

 

[Roy Macoy]

Thanks again for such a detailed response, I really appreciate you giving your time to help me here.

Well, I am not exactly sure how it applies to me either. All of these terms and systems are new to me, and I'm just trying to wrap my head around it all.

As mentioned in my previous post, the reason I brought up the reverse charge mechanism is because one of the VAT specialists that I spoke with said this:

"Overall it appears that your income coming from non UK companies is a taxable turnover subject to reverse charge so you are liable to register for VAT but will not end up paying anything as what will you pay as VAT will automatically be reclaimed so there from cash outflow perspective it will have a Nil impact so getting VAT registered especially when there are no financial costs (due to reverse charge as explained above) will ensure you are in compliance with the VAT rules."

Now I am questioning why he said that, because like you said, I am being paid by a US company, not a company from the EU. And from what you said, reverse charge only applies to EU based businesses.

However, from what the other person who posted here said, and from what I have been reading, I'm starting to think that Youtube might be considered the customer in my situation, not the US company. The company are essentially middlemen in this situation. I am owed the royalties from Youtube, regardless of whether I am involved with the US company or not. I have just effectively enlisted them to collect those royalties on my behalf, while they take a percentage for doing so.

But even if that is the case, as the company collecting the royalties for me are US based, I can only assume that they are being paid by Google Inc., not Google Ireland. So the reverse charge mechanism still would not make sense in this situation, if I am understanding it correctly.

From what I can tell, whether either the US company or Youtube is the customer, I should not have to pay VAT in either case..

 

[TheCyclingProgrammer]

I really don’t understand what the VAT specialist is getting at. Supplies that are subject to the reverse charge are accounted for by the customer. Income (supplies from the perspective of the supplier) are never subject to the reverse charge.

That’s the whole point of it. Instead of the supplier charging and accounting for VAT on their sale as they would on a domestic supply, the customer does instead.

You are the supplier. You are receiving income for a service. By definition the reverse charge is irrelevant to you, it’s only relevant to the customer. Income that is outside the scope of U.K. VAT does not count towards the registration threshold.

I could be missing something here but I don’t think I am. Perhaps there has been a miscommunication and the person you spoke to thought you were purchasing a service from overseas rather than making a supply.

 

[UK Contractor Accountant]

The VAT specialist is saying Google Ireland accounts for the VAT under the Reverse Charge Mechanism as he agrees with me your end user is based in Ireland EU.

Do UK publishers need to pay VAT on AdSense earnings?
UK based publishers who are VAT registered do not need to pay VAT on their AdSense revenue. The VAT has been accounted for by Google already. It should however be recorded as 0% VAT on the VAT return.

This revenue does though still count towards your VAT threshold and could also cause you to pay more VAT if you are on the flat rate VAT scheme.

As the “Sale” is to an EC Country (ie, to Google in Ireland) it should also appear on an EC Sales list. If you submit your return online you can request that “EC Sales list” is added as a service on your account.

 

[Deleted member 59730]

A US company I signed up with uses technology to find any Youtube videos that contain my music. They then collect the royalties (my share of the ad revenue) from Google/Youtube on my behalf, and then pay me in US dollars.

Do I need to register and pay VAT on this income?

Dear Roy

For many years I earnt royalties from the licence of copyrights. I would say that the US company are acting as an agent on behalf of yourself. The money you receive is based on invoices issued on your behalf either in or from the USA. Therefore there is no VAT involved.

 

[JEREMY HAWKE]

Either way you are turning over 150 K per year so you really need an accountant to do the numbers and structure your operation in a tax efficient way
Before you take on your accountant you should try to find one that specialises in media businesses

 

[UK Contractor Accountant]

@lesvatadvice

 

[Newchodge]

You are already making a common mistake with regard to VAT. It doesn't matter what your turnover was in 2018/19. VAT is cacluated on a rolling 12 month basis, so if you started trading on 1 April 2018 you need to check your total income to date on the 1st of every month until it reaches the VAT threshold, at which point you register. On 1 May 2019 you check the 12 months to 30 April 2019 and so on.

If you are liable for VAT, which, hopefuly you are not, you are already more than 9 months late in registering.

 

[UK Contractor Accountant]

You are already making a common mistake with regard to VAT

dont think he is if all his income is subject to the reverse charge mechanism

When you buy goods or services from suppliers in other EU countries, the Reverse Charge moves the responsibility for the recording of a VAT transaction from the seller to the buyer for that good or service.

That way it eliminates or reduces the obligation for sellers to VAT register in the country where the supply is made.

 

[Newchodge]

dont think he is if all his income is subject to the reverse charge mechanism

When you buy goods or services from suppliers in other EU countries, the Reverse Charge moves the responsibility for the recording of a VAT transaction from the seller to the buyer for that good or service.

That way it eliminates or reduces the obligation for sellers to VAT register in the country where the supply is made.

That is why I said

If you are liable for VAT, which, hopefuly you are not, you are already more than 9 months late in registering.

Other people, who don't understand VAT read these threads too.

 

[TheCyclingProgrammer]

The VAT specialist is saying Google Ireland accounts for the VAT under the Reverse Charge Mechanism as he agrees with me your end user is based in Ireland EU.

Do UK publishers need to pay VAT on AdSense earnings?
UK based publishers who are VAT registered do not need to pay VAT on their AdSense revenue. The VAT has been accounted for by Google already. It should however be recorded as 0% VAT on the VAT return.

This revenue does though still count towards your VAT threshold and could also cause you to pay more VAT if you are on the flat rate VAT scheme.

As the “Sale” is to an EC Country (ie, to Google in Ireland) it should also appear on an EC Sales list. If you submit your return online you can request that “EC Sales list” is added as a service on your account.

Where did you copy the above from as it doesn’t sound right at all.

If the VAT is accounted for by Google Ireland under the reverse charge that means:

1. It’s outside the scope of U.K. VAT. It’s not zero rated. Exports of goods are zero rated, not services. It would be included on your VAT return in box 6 if you’re on the standard scheme.

2. It does not count towards the VAT registration threshold.

3. It’s not included in your flat rate turnover if you’re on the VAT FRS.

The only thing that is correct in the above is the bit about the EC sales list but this only applies if you’re VAT registered in the first place.

 

[TheCyclingProgrammer]

Just a thought - OP could the “specialist” you spoke to be confusing AdSense with AdWords and assumed you were making a purchase of advertising instead? It’s the only reason I can think of why they would have said to you what they did.

 

[TheCyclingProgrammer]

Either way you are turning over 150 K per year so you really need an accountant to do the numbers and structure your operation in a tax efficient way
Before you take on your accountant you should try to find one that specialises in media businesses

I agree.

It sounds to me like all of OPs income - from Adsense or other royalties collected from overseas - is outside the scope of U.K. VAT so there should be no worries about breaching the VAT registration threshold.

But even if that is the case a good accountant would probably save them money.

 

[UK Contractor Accountant]

Where did you copy the above from as it doesn’t sound right at all.

If the VAT is accounted for by Google Ireland under the reverse charge that means:

1. It’s outside the scope of U.K. VAT. It’s not zero rated. Exports of goods are zero rated, not services. It would be included on your VAT return in box 6 if you’re on the standard scheme.

2. It does not count towards the VAT registration threshold.

3. It’s not included in your flat rate turnover if you’re on the VAT FRS.

The only thing that is correct in the above is the bit about the EC sales list but this only applies if you’re VAT registered in the first place.

i think it was written on the basis that the trader is already vat registered.

yes if under the reverse charge mechanism its outside the scope of of UK VAT and does not count towards the taxable turnover of the seller (it will for the buyer!)