For a while now I have been meaning to blog about a VAT confusion that is currently present (as of May 2012) in the UK market which could have far reaching implications for many lead gen businesses who operate in the financial sector.

For the sake of clarity, where I refer to an “Lead Generator or Seller” I mean any business who sits between the consumer and the lead transactor (eg: a transactor is a broker or IFA etc). So essentially I refer to any internet marketing firm that simply sells leads to an aggregator, a broker, an IFA or the company that deals with the conclusion of the lead process.

So therefore lead “sellers” might include companies like Media Ingenuity (who own TotallyMoney), MoneySupermarket, IPT, ValueClick, Leadbay, SimplyMediaNetwork, LeadPoint, Leadcoop etc,  and a “Buyer” is the company the does the contractual process such as brokerages (eg:LifeSearch), debt management firms (eg: MoneyAdviceGroup) or any IFA’s.

Having been immersed in the world of finance lead gen and equally immersed in the complex world of VAT regulation, it has become clear that there are a lot of companies in the UK who may be building up a big VAT liability and likely get a visit from HMRC.

There is real confusion over how lead generators (and lead aggregators) should treat VAT on financial leads.

I have spoken to many people in the financial services lead generation market and the confusion centres around specifically what activity qualifies for VAT exemption and what does not. ie: What do you need to do with a lead for it to become an exempt supply as on its own, it is not exempt supply and many companies are under the false impression that any finance lead is exempt.

Below are some basic rules broken into selling and buying leads and/or media for intermediaries:

Selling Leads

Insurance Leads

Insurance leads have a different treatment to Finance leads. A Finance lead is any lead that has to do with money lending such as Loans, Mortgages etc.

VAT legislation defines a VAT exempt insurance intermediary as someone who brings together persons seeking/providing insurance or someone who carries out work preparatory to the conclusion of contracts of insurance or reinsurance.

Guidance (from HMRC) gives more specific detail of relevant activities:

Activities that qualify for VAT exemption:

Acting in an intermediary capacity in the chain between the insured and the insurer:

• Introductory services, including work preparatory to a contract (regardless of whether a policy is ultimately purchased).  This includes preparation of application forms and forwarding these to the insurer.
• Administrative assistance relating to the performance of contracts
• Claims handling
• The collection of premiums

Activities that do not qualify for VAT exemption:

• Market research and product design
• Advertising
• Promotional or similar services (including ‘click throughs’ on websites where no policy negotiation etc is carried out)
• Collection and provision of information,
• Valuation and inspection services, services of loss adjustors, motor assessors, surveyors and similar experts.

HMRC Guidance for Insurance Intermediaries (HMRC Brief 31/10)

Of practical relevance in relation to web-based insurance intermediary activities, following the Insurance Wide case summarised in Appendix 3, HMRC issued guidance confirming that VAT exemption will apply in situations where the business is acting as more than a ‘mere conduit’.  They list 4 tests to be met:

1. The services are provided by someone engaged in the business of putting insurance companies in touch with potential clients or more generally acting as intermediaries between the two parties (although this may not necessarily be their principal business activity).
2. The business provides the means (that is, by way of an internet ‘click through’ or some other form of introduction) by which a person seeking insurance is introduced to a provider of insurance or to another intermediary in a chain leading to an insurance provider.
3. That introduction takes place at the time a customer is seeking to enter into an insurance contract (although in some instances an insurance contract may not actually go on to be finally concluded).
4. The introducer also plays a proactive part in putting in place the arrangements under which that introduction is effected.

For the purposes of condition 4 above, evidence that the introducer has been proactive in putting in place the arrangements under which the introduction is effected could, for example, take the form of some or all of the following:

• active endorsement of the insurer or the insurance product
• involvement in the selection of the insurance products and/or providers
• involvement in the process under which the insurance contract is entered into, even though  the intermediation of the contact itself is undertaken by a 3rd party (for example, by having input into what questions should be asked of the prospective insured or the design of the 3rd party’s website)
• negotiating a special rate for the insurance product/s on behalf of its customers or  membership base
• some form of assessment of the customer’s requirements so that they are directed to the most appropriate insurer for them

So what this means in practical terms is that, unless you are involved in the negotiation process, you are deemed an “agent” and therefore required to charge VAT on lead you sell.

Selling Leads

Finance Leads (Mortgages, loans etc)

The rules around selling Finance leads is even tighter than Insurance leads and a good friend of mine who is an IFA has informed me that the plans next year will make the rules tighter still. Something to the effect that you need to actually be part of the final contractual signature chain to claim exemption.

The rules as they stand today are below (from HMRC):

To be regarded as a Finance intermediary, the business needs to be:

(i)              bringing together persons who are or may be seeking to receive financial services and persons providing such services; and

(ii)            performing work ‘preparatory to’ the conclusion of the contracts.

Activities that qualify for VAT exemption:

In terms of activities that are deemed to be ‘preparatory work’, the following activities need to be carried out in order for VAT exemption to apply and they are regarded as being specialised in nature:

• The completion and checking of forms and sending them to the financial institution.  This element can be carried out by specialised software, AND
• Mediating between the customer and financial service provider.  This means the activity must involve a process of negotiating contract terms and/or price, regardless of whether the customer ultimately decides to take up the offer.

Activities that do not qualify for VAT exemption:

• Market research and product design
• Advertising
• Promotional or similar services (including ‘click throughs’ on websites where no contract negotiation etc is carried out)
• Collection and provision of information

So in summary, if you are a UK based VAT registered company that  just sells leads to an aggregator or a brokerage; you are very likely building yourself a VAT liability (assuming that, like many companies, you are not charging VAT).

You also need to apply VAT to your offshore media buying, (eg: google) which you cannot claim back if you do not charge VAT on the lead.

Additionally, just to add to the joy…HMRC can go back up to four years to reclaim they money – and they actively do.

There is some good news though and a way out if you have a liability… If your business does have a liability, what you need to do is raise a “VAT only” invoice to all your buyers who should have been charged VAT. Now obviously this could destroy your relationships with buyers but what a lot of people are unaware of is a thing called “VAT Bad Debt exemption”. Essentially, if you raise a VAT invoice and the company will either a) not pay or b) the company is no longer in business then after a period of six months, HMRC will write off your liability.

With so many Life Insurance brokers, loans and mortgages firms going bust in the last few years, many companies will find there is a way out of a portion (if not all) of their liability as the chances are, they sold to some of the firms who have closed down in the past.

Buying Leads

So this is where the fun really starts! (assuming you are a UK, VAT registered company), there are two simple things that you need to know and apply to your buying activity:

1) If you buy offshore media (eg: Google, Yahoo, facebook etc) from ANY company who is outside the EU and does not charge VAT on their invoice, it is YOUR responsibility to apply the reverse charge rule and pay HMRC 20% VAT on top of the cost of the media.

As you may know, this applies to all your outside-the-uk purchases, not just media buying. The rule is aimed at creating a level playing field so that you cannot seek a competitive advantage buy buying outside the UK. (Which is totally fair and reasonable in my view).

Now with most businesses, this does not really matter as you can claim the VAT back, but if you are selling a VAT exempt product then you cannot claim it back and therefore you are the liable party.

As an example, if you buy clicks from Google, you will note they do not have VAT on their billing invoice. It is therefore down to you to apply VAT when you record it on your books.

As said above, this applies to all companies that do not charge you VAT. This may not be news to you but I spoke to no less than five accountancy firms and  additionally nine industry professionals and only one person from Industry know this (they were an international company) and only two of the accountancy firms knew it. (The latter point is quite extraordinary!).

Part of this lack of knowledge may be due to the fact the reverse billing law changed in Jan 2010 to enforce the above rule, here is except from HMRC:

Imports and purchases from abroad: paying and reclaiming VAT

Generally speaking, VAT is payable on all purchases of goods and services that you buy from abroad at the same rate that would apply to the goods or services if supplied in the UK. You must tell HM Revenue & Customs (HMRC) about goods that you import, and pay any VAT and duty that is due. Read more

2) If you are buying actual “leads” and not clicks from companies based overseas (eg: USA) and think you are gaining a VAT advantage then think again. It all depends if the USA company (the lead generator) is doing sufficient to make the lead exempt, chances are they will not be.

The obligation sits firmly with the buyer (eg: the company buying leads from the non UK generator in this instance, not the final destination buyer such as a Broker)  to make a judgement on whether the supply constitues an exempt service and if it does not (based on the rules stated above) then you should be applying VAT. Interestingly, this also applies to brokerages/Intermediaries.

This is where the majority of the problems in the UK reside. HMRC has been slow to realise the impact of the net on international lead generation and technology developments (no surprise there) and they urgently need to confirm exactly what type of lead supply may or may not be exempt.

Most industry professionals I have spoken to (and VAT consultants) think the rules are very grey on what truly constitues an act of exemption.

In the past five months I have had 4 (highly paid) VAT consultants give me “official” advice on what specifically constitutes an exempt lead when you take into account the lead validation and lead matching that happens in companies like mine, none of them have been able to say with absolute certainty how internet leads will be viewed. Only the HMRC can say yes (or no) and the industry needs an answer now.

If HMRC declare my business to be VAT liable then it will have far reaching consequences for the industry as it is the same ruling that will apply to nearly all finance lead generators who are trading leads as VAT exempt products.

It is true that there are  currently legal ways to have “work arounds” such as sending leads offshore and converting them into a different VAT product but that to me is a dangerous loophole HMRC will close pretty soon. I could be wrong.

So in conclusion, you may be as confused as everyone else. The answer will soon be on the table as HMRC are currently looking at this issue with a number of companies in the space (including mine) to establish exactly what is correct.

If it proves negative for our industry then the next course may be group legal action to prove our industry case however the past experience of legal action with HMRC is that if you lose, they simply change the rules to make their point apply (see the InsuranceWide case) – it pretty much made them bankrupt in the process.

In Conclusion

So not a pretty picture and as said above, there are a LOT of companies that currently benefit from a VAT exemption which, if ruled against, will mean buyers/IFA etc will have to accept a hike in lead prices as nearly all lead generation companies I know work on the slimmest of margins when generating Life & Mortgage leads, they simply cannot absorb a 20% cost without a material change in their business operations.

Right now we have a two tier system, those companies who are paying VAT and trying very hard to make it work and those companies taking the advantage (and probably building up a potential VAT liability) it is pretty anti-competitive and not a long term scenario.

What is more concerning is that, as we speak there are more and more USA based companies taking advantage of this confusion and able to buy media cheaper than a UK VAT registered company. It will not be the USA companies they will be not left holding the can, it will be the UK companies who buy their leads.

Next steps will be to get the verdict from my HMRC officer, meet with the other companies in the space who are also going through the same excersize with their HMRC officers and compare notes.

One scenario is that we have a different outcome from different HMRC officers, this is not totally unexpected as has happened lots of times when dealing with complex VAT issues.

The best case is full exemption on both types of leads (Insurance and Finance)

The worst and most far reaching scenario is that we are all told that all leads are VAT’able unless we are acting as a broker which means a change in the charging structure to buyers or a change in operational profits for our businesses.

This last scenario will actually be even more alarming as many companies will have a 4 year liability to deal with if they have been trading leads VAT exempt (as most have).

Time will tell, but it will not be too much longer. I expect an update by end June 2012 and will comment further when I have information.

HMRC need to clarify VAT exemption rules for financial lead generation is a post from: NigelFrith.com

Today – 31st October 2011 – is a day for the diary as it marked the day when the world population officially hit 7Billion.

The car gets a fair chunk of blame when it comes to over consumption of materials and causing polution. It is said that all cars should be Hydrogen cell based as this is by far the cleanest and possibly the most sustainable technology we have produced to date – the problem is that it is just too expensive at this time, but so too were the first commercial computers (The Ferranti Mark 1) they were the size of a small van and cost several annual salaries of the average person.

7 Billion & Counting is a post from: NigelFrith.com

It is a sad day. As a late comer to all things mac, I am fully converted and no other person has made the computing experience so simple, intuitive and sophisticated. Not to mention the advances in music playing and storage.

When Pixar is only your 4th greatest achievement, you can hold your hand up to having a very special life.

What other innovations have we lost with the passing of Steve Jobs?  Thank you Steve, you will be sadly missed.

The King Is Dead, Long Live The King. R.I.P Steve Jobs. is a post from: NigelFrith.com

So yet again a big brand gets caught trying to game Google, what JCPenny did (or rather their SEO agency did – allegedly) is, in Google’s eyes wrong but is it uncommon practise? On this occasion they got caught out but in the modern world of ranking; I would hazard a guess that most big sites (by that I mean sites with over 5m UU per month) have, at some stage engaged in a little link purchasing. I am lucky to have got to know a number of people who have successfully grown some big sites and only a couple of them can honestly say they have never had link purchasing as a major part of their SEO strategy at one point or another.

So, on to the subject of this post. Clearly and proven beyond all doubt, Google (by their own admission) cannot keep on top of “illegal” link activity. It must sap a huge amount of resources and effort to try to keep up to date with known illegal activity and also dealing with spam reports. Sometimes it pays to think the unthinkable when trying to work out how the whole business of linking may change in the future to combat issues and find a genuine way to rank sites importance. Below are some random thoughts: (and boy do I mean RANDOM!)

Conspiracy One – “nofollow” links carry more weight than “dofollow”: like all the suggestions below, this sounds crazy but let’s think about this a second. Anyone who sets a link as a nofollow is likely to be either engaged in PageRank sculpting, a tight-arse who does not want to pass link love or more likely a site that is simply referencing another site for genuine reasons.

Now herein lies the clue. The fact of the matter is that very few SEO’ers are going to spend cash on “nofollow” links. So therefore it stands to reason that more of the nofollow links are likely to be much more relevant and created for the true intention of why we are supposed to create a link: to reference a useful page, not pass PageRank. A crazy idea? woud it really surprise you to find out that TrustRank has a major component that upweights nofollow links. One to test at some point soon – comment if you know

Conspiracy Two - Outbound links are as valuable as Inbound links: Many of us have suspected and even proved that outbound links can be critical, it is why you see so any pages linking to authority sites like wikipedia. What intrigues me and makes me think that we are all underestimating the true value of outbound links is a little line hidden somewhere in the Google Webmaster Guidelines (I can’t locate the actual line so I think I may have seen in the the Q&A section on the link provided) but it states to the effect that “you are responsible for sites that you link to so if you link to poor quality or irrelevant sites, your ranking could be

Google, TrustRank, PageRank, Conspiracy Theories and More. The Future Of Ranking? is a post from: NigelFrith.com

The last few years has seen the

Will Ipads & Tablets Be The Death Of DS & PSP’s? is a post from: NigelFrith.com

The writing has been on the wall for a long time about data charging – I commented on it recently about the effect negative effect Twitter would have on the small but growing social media industry by charging huge amounts for its content.

Well things have just changed up a gear or two…. I just got off the phone with a leading social media monitoring firm (Vocus) to hear that Facebook have stated they will be charging over $1m per year for

Content is King! Long Live Data…Until We All Make It “Private” is a post from: NigelFrith.com

As someone heavily involved in social media and being a founder of SocialLabs I was as concerned (as other social media start-ups

Twitter API Charges May Start To Kill The Social Media Industry is a post from: NigelFrith.com

That may seem a controversial question but let us ask ourselves this: If Google do not make any sizeable acquisitions that provide them new sources of traffic they do not get from their owned and operated properties, where will the growth come from?

It is very possible that this years

Has Google Really Had Its Day For Search Traffic? is a post from: NigelFrith.com

Comscore Historical Cyber Monday Stats

Over the last few years we have seen a continual rise in the amount of traffic concentrated on just one day of the year for online shopping. It is true to say that from about November 1st, web traffic for online retail really starts to build up but there is one day in the year which it all comes to a peak – this year, that day that is expected to be on Monday 6th December 2010 – aka “cyber monday”

Having studied traffic trends from some very large shopping comparison sites over the past 5 years the trending of traffic has been quite interesting as it has shown clearly the generally peaks and flows throughout the year – what we see as a normal pattern is a very strong January, with numbers being as high as all of December and sometime beating December but never is there one day which surpasses the cyber Monday stats.

February is a big drop – usually atleast 30% lower than November numbers and as much as half of December/January figures. April is poor normally then it climbs back up to stabilise for May and stays pretty much consistent for the rest of the year with a few low points during summer holidays and bank holidays. In 2010 the General Election in May had a very negative effect on traffic so 2010 has some catching up to do in general.

Traffic starts a slight growth in September with October coming back strong and then, as said above, 1st November seeing the first real signs of the Christmas rush

This year will be even stronger mainly due to two reasons – 1) many more retailers are pushing their online strategy and also using social media to get more users and 2) sites that provide sales information on cheap electricals and voucher codes sites are set to see a bumper increase in consumers hunting down the best deal. What a lot of consumers are starting to realise is that the main retailers do not always put the best deal on their own sites – instead preferring to get extra traffic by letting affiliate sites offer goods at just a few % less than the deals on the main site. This is especially true with voucher codes.

Which Day Will Be The Biggest Christmas Shopping Day 2010? is a post from: NigelFrith.com

How will it change things? well for one thing I think

How will Google’s site preview function change search behaviour? is a post from: NigelFrith.com