#AD #GIFT AND THE TAX IMPLICATIONS

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The way businesses reach out to consumers is constantly evolving and changing and social media partnerships and paid for content is now standard.  There has been a lot in the press over #AD and #GIFT and transparency and the ASA rules and I am not going to regurgitate this here as it’s not my area but if you want to read up on it then here are some fab links:

https://meandorla.co.uk/instagrams-new-branded-content-what-is-means-for-you/

https://www.asa.org.uk/news/new-guidance-launched-for-social-influencers.html

My area is in how the heck do you account for all this and what does it mean for your tax bill!!

There are three scenarios to consider:

1.     Content in exchange for monetary payment (hard cash)

2.     Content in exchange for product(s)

3.     Gifted product(s) with no expectation of content

For each of these we need to consider if there is an income to be declared within your accounts and then I will run you through double-entry bookkeeping and what that means to all this and finally the tax implications!

Is there an income?

1.     Content in exchange for monetary payment:
In this scenario, yes, there is a very clear income to record in your books – you have been paid for your services.

2.     Content in exchange for product(s):

In this scenario, you are being given product(s) for review, feedback and content.  Although there is no cash changing hands you are receiving payment in kind for your work (no-one wants to work for free after all). In this instance you need to be recording an income that is equivalent to the cost of the product, note I say cost not RRP.  It needs to be the cost of the product to the business that is supplying it to you.  I appreciate not all businesses will want to tell you what their margins are so fully expect that there will be some sort of confidentiality clause in your contract with them.

3.     Gifted product(s) with no expectation of content:
in this scenario, a business (often a small business) will have sent something to you on the hope that you like it and will mention them – there is no requirement or expectation for content it is basically ad-hoc hopefulness on their part and then kindness on yours that you give them a shout out.  As yet, kindness isn’t taxed so there is no income to declare even if you do give the business a shout out because you loved it.

If you then work with that business in the future, then it would fall under scenario 1 or 2.

When there is content being provided I would also recommend that an agreement is put in place so that you know what you are being paid (money or product), the value of this payment (money or product with a cost to the business of £x) and what content expectations are in return.

Double-entry bookkeeping in a nutshell

I always try and keep blogs simple and accessible but very simply, double-entry bookkeeping is what makes your accounts balance.  There are two sides to every entry:

·        You make a sale, you receive cash

·        You spend money, you get a product/service

There has to be balance between the two, like a set of old-fashioned sweet shop scales.

Even if you keep very basic spreadsheet records, your accountant is using double entry to get to your accounts.  If you use software, it might seem like you only put in one entry, but the rest happens behind the scenes.

Basically, it means you have income and ….

Double entry bookkeeping and our scenarios

This means that for the incomes in scenario 1 and scenario 2 there needs to be another side to these (scenario 3 doesn’t matter as we aren’t recording income):

1.     Content in exchange for monetary payment:
We have income and cash (eventually, it’s unlikely you will be paid immediately but let’s not overcomplicate things with the in between steps)

2.     Content in exchange for product:
In this scenario we have income and then ??? you aren’t owed money; you haven’t received cash.  What you have is an asset held by the business instead. So, what could this asset be? That depends on what the product is:

a.    Fixed asset – this is an asset that you can use within the business i.e. a camera, computer, furniture etc.  It has a longer life span.

b.    Stock item – in this instance it is something that you will “use” for the content but is still there and so it might be something you would sell on or give away in the future for a competition etc ie designer handbag etc

c.     Expense – in this instance it is something that you use and is gone i.e. food, make-up, etc.

Tax implications

Hopefully I haven’t lost you! Looking at our scenarios again, and let’s assume that you are being paid £1,000 be that in cold hard cash or in product:

1.Content in exchange for monetary payment:

You have £1,000 of income and this is taxable.

2. Content in exchange for product(s):

a.    The £1,000 of product is deemed to be a fixed asset with a useful life of 4 years.  There is £1,000 of income in the accounts and we would claim £1,000 of capital allowances giving tax of £nil.  The fixed asset would be depreciated (where the cost is spread across several sets of accounts) over the 4 years but depreciation is ignored for tax purposes. If you then sold this further down the line any proceeds would be classed as profits on the sale and you would be taxed on these at the time. 

b.    The £1,000 of product is deemed to be stock and so the £1,000 of income is taxed at the time.  The stock is reviewed each year to check it hasn’t decreased in value and if it has the difference is written off and tax relief claimed (so if it has fallen to £800 of value, you would get tax relief on £200).  If you sold the stock for £1,000 then you would get £1,000 of tax relief, if you sold the stock for more than it’s cost you would get taxed on the extra above the cost to you only and tax relief for the cost of £1,000.
If you were to give it away in a competition then the cost would be expensed and you would get the tax relief.
This basically means that although it might not all be in the same year, you would get to a position of £nil tax on the product and only being taxed on any profit made. 

c.     The cost is written off at the time as it’s all gone so you have income of £1,000 and cost of £1,000 meaning no tax.

So basically, as harsh it feels to record income when you are given product for content, the reality is you will only pay tax on any profit you make from that product if you sell it on.

What tax you pay depends on your business set up: if you are self employed then it is income tax via your self assessment tax return and if you run as a limited company then it is corporation tax.

Minor complications

If a product given to you and is for more than just you i.e. a family holiday and it is all free then the income would be the whole value of the product but the offset cost that would be allowed would be limited to the cost for just you as that would be the business only element of it.  Or if you run as a limited company and the whole offset cost was put through it would be deemed a taxable benefit in kind and you would pay tax personally on it.  Which is why often in these scenarios it is only part free and part paid for!

There are also rumblings about whether there should be a benefit in kind tax, but until I see something to persuade me otherwise, my view is that the products are essential part to doing your job – you can’t review or advertise something without them!

Disclaimer – this is my interpretation of the tax rules and the way things are currently working, nothing stands still where HMRC and tax are concerned which means someone else may interpret the rules differently. The old advert said: “Tax doesn’t have to be taxing”, well, they lied! It’s as complicated as ****!