Influencer marketing is big business, with the social media influencer market estimated to be worth approximately £15 billion globally, with more than 50 million people around the world considering themselves to be influencers. Its impact continues to develop with pace and analysts are forecasting 33% growth through to 2030 when the market is expected to be worth an eye watering £115 billion.
Closer to home, a recent UK survey indicated that more than 68% of business-to-consumer (B2C) brands utilised online influencers as part of their marketing strategies. Over two thirds of the remaining brands were considering the use of influencers for online marketing purposes with the fashion and lifestyle sector having the largest share (29%) of the influencer market.
Working with influencers for social media marketing
Unsurprisingly, marketing budgets for influencer spend is increasing as businesses see the opportunities which influencers’ global reach could create in terms of market growth. A key element of this, which is becoming ever more prevalent, is providing influencers with products for them to showcase through their social media channels and to promote to their followers. With this comes some VAT complexities and risks, particularly if the arrangements with the influencer are informal and not covered by a contract.
Due to the visibility of influencers, HM Revenue & Customs (HMRC) can quickly and easily identify retailers/brands whose products are being featured by influencers, and can then approach the retailer/brand with questions regarding how the company is addressing the VAT implications of ‘giving its product away’ for advertising or marketing purposes.
What is the VAT issue?
Giving away products for marketing purposes is a legitimate business expense. However, when a product is ‘given away’, companies should consider business gift rules (where applicable) as they can create a deemed supply, on which VAT is due. Depending on the circumstances there may also be a barter transaction where a product is given in return for services being provided.
Subject to a £50 value condition which applies to gifts given to the same recipient over a 12-month period, VAT is due on gifts where the party making the gift has been entitled to reclaim the VAT on the purchase or manufacture of the product in question. Businesses may feel that not claiming VAT back on the purchase of goods, which are being given away to influencers is the answer to eliminate any risk of HMRC exploring the issue. However, the deeming provisions apply even when a business does not claim back the VAT, although they are entitled to do so within the rules which apply to VAT recovery.
Generally speaking, HMRC would expect VAT on a business gift to be brought to account based on the retail price of the goods. There are certain circumstances where VAT based on the cost price is appropriate, however if HMRC’s and the business’ views are not aligned, issues can arise. For some businesses this is a big deal, as the amount of products given away to influencers can be significant.
Are product samples liable to VAT?
Where goods are being given as samples, there is no deemed supply on which VAT is due. The accepted definition of the sample for VAT purposes, is “a specimen of a product which is intended to promote the sale of that product, and which allows the characteristics and qualities of that product to be assessed without resulting in final consumption, unless final consumption is inherent in such promotional activities”.
It seems entirely plausible that influencers will be asked to assess the product and to demonstrate its qualities through their social media channels, as part of the marketing approach. It may not always be the case however, that the influencer would be suitably qualified or possess the expertise to deliver such an assessment. For example, their involvement in brand marketing campaigns could purely be due to the reach of their online exposure, in which case it may become more difficult to demonstrate the product has been given away as a sample, particularly in cases where there is no formal agreement with the influencer.
What happens if influencer contracts are in place?
Generally, the lack of a formal contract with an influencer can result in complexities and uncertainty over the VAT position. However, the complexities do not necessarily end with the signing of a contract.
More formal arrangements will often be entered into, which detail the type, volume and frequency of product giveaways to the influencer, with agreed terms which the influencer must meet which take form of various promotional commitments such as on social media and/or live events.
Considering such arrangements purely from a VAT perspective, there is a barter transaction present where products are given in return for non-monetary consideration, in the form of promotional activities and advertising. For the business engaging with the influencer in this respect, the challenge then becomes how the barter is valued to determine how much VAT is due on the supply of goods made (and what the value of the services being received from the influencer is, which would also be subject to VAT even in the absence of a cash transaction). Cost price is a popular option, and there are supportable grounds for this, although HMRC may take the view the value should be based on the retail price value.
HMRC may also see barter transactions where there is no formal agreement in place, but there is an expectation (rather than an obligation) for the influencer to effectively provide promotional services. Again, HMRC may expect VAT to be accounted for on a retail price basis. If there is no reciprocal service performance by the influencer, there arguably is no supply for VAT purposes, because the lack of consideration means the condition required for there to be a supply, would not be met. However, we do note that HMRC would be sceptical in this scenario.
VAT and influencer marketing – further considerations
Influencers have been able to commercialise and monetise their online activities to great effect with this career path, earning the title of ‘modern-day entrepreneur’. As with any entrepreneur, it would be for the influencer to be aware of whether they were operating a business for VAT purposes. The business and indeed the VAT status of the influencer, does not necessarily change the VAT implications which arise when a product is given away, and VAT would still need to be brought to account by the business gifting stock, as described. The VAT registration threshold in the UK is currently £85,000 and when this is breached will depend on the location of the customer, so advice should be taken.
If the influencer is based overseas and the products are sent outside the UK, then a supply of those products would be eligible for the zero-rate of VAT under rules pertaining to the supply of exported goods (subject to conditions). The provision of influencer services would then become subject to reverse charge VAT for the UK business to account for, which would mean yet more VAT implications to address.
Working with influencers and entrepreneurs: How can we help?
The impact of influencers on a business marketing strategy is not to be underestimated, and it is only likely to increase further as the consumer appetite for social media content shows no signs of abating. Emerging sectors in this space, such as esports, indicate an active environment in which consumers are increasingly likely to buy-in to an influencer’s view of a particular product. However, with these trends, comes some wider considerations for businesses, not least the VAT implications which they should be mindful of.
Whether you are an influencer or a business grappling with any of the issues discussed, please speak to your usual Saffery contact, or get in touch with Nick Hart, VAT Director or Stuart Macdougall, Partner and Head of our Entrepreneurs Practice Group for further guidance.
We would also highlight that from 22 May, HMRC have closed their VAT registration helpline but an online tool is available for businesses wanting to check the progress of their applications.