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The world of influencer marketing is fast-paced, dynamic and growing in popularity amongst brands across a huge range of sectors, but what are the key considerations for both businesses and influencers? Andrew Jackson Solicitors’ tax specialist and partner, Fiona Phillips, and Katy Hansom, commercial partner, examine the key issues around financial implications and the importance of having a contract.
Whilst influencer marketing and the practice of celebrity endorsements has been around as a marketing and promotional tool for several decades, the advent of social media has resulted in a growing number of businesses turning to influential social media communicators as a means of growing their brands. In return for their endorsement of a product or service, the influencer receives free goods or are paid a fee.
Influencers may not consider what they are doing as “trading” and therefore fail to consider the tax implications.
Badges of trade for taxation purposes
As it is a relatively new way of marketing products, it is not surprising that the taxation of influencers has no specific tax guidance, meaning that normal tax rules need to be considered. However, applying the long established ‘badges of trade’ concept – tests used by HMRC to determine whether an activity is a trading activity – will identify if a taxable business is being undertaken.
Of the various badges of trade, there are two that are most relevant to influencers, namely:
- i) whether a profit motive exists, and
- ii) the number and frequency of transactions.
HMRC has published guidance for athletes receiving sponsorship, endorsement, and attendance fees, and to what extent they amount to trading. These fees have a similarity to receipts by influencers, and so provide a useful guidance.
Rules around taxation
Assuming that the influencer is trading what is the position on goods received as opposed to cash?
Any products given to them to promote will be taxed as trading income, based on the monetary value of the product. However, a non-transferrable gift – e.g. a holiday, which only the influencer can take, at a particular time – will not be taxable as there is no monetary value, since it cannot be sold on and converted into cash.
But what about businesses, which are paying the influencers, either as cash, or by providing them with products or services in return for endorsements by the influencer?
One issue to consider is whether the relationship between the influencer and the business whose goods they are promoting give rise to employment status. Under general taxing principles a relationship that is a contract of service will mean that the influencer is an employee, so PAYE and NIC should be considered.
Alternatively, an influencer promoting goods might already be an employee of the business, in another capacity.
In either case, cash paid to the influencer should be after deduction of PAYE and NIC.
Employee status also has an implication where goods are provided. Under normal taxing principles, if an employee receives goods from their employer, they are taxed on the monetary value of the goods (under the so-called ‘benefits in kind’ regime).
Alternatively, the relationship between the influencer and the promoted business could be a contract for services – therefore no PAYE/NIC issues arise for the business. It is then the influencer’s responsibility to ensure that they have complied with their tax reporting and payment requirements.
For the business, any costs it incurs in providing goods or services to the influencer will be deductible from its taxable profits, under normal principles.
In addition to the above, any individual who is trading should consider VAT, if their turnover exceeds the VAT threshold. For the more successful influencer, this could be an issue.
Contracts: protecting your business
Many influencers are appointed by businesses without there being a contract in place between the parties to govern the arrangement. This is risky because without an influencer contract you will have little protection if things go wrong, which may damage the brand and its reputation. As with any other business arrangement it is sensible to ensure the parties understand from the outset what the expectations are and where the limits lie, and that this is set out in a binding agreement.
Having a contract will cover some of the key risks by: –
Setting expectations: Any transaction that involves payment for services, compliance with deadlines and brand promotion should be governed by a legally binding contract so that the arrangement between the parties is clear. It will set out what the expectations of the influencer are, allow you to exercise some control over influencer content and also to manage use by the influencer of brand and intellectual property. It will enable you to act quickly, and with the backing of a contract, if things go wrong. It will also cover standard matters such as confidentially, access to influencer data and results, termination, and cancellation as well as monetary considerations.
Protecting your brand: by appointing an influencer, you are aligning your brand with the influencer. If the influencer behaves in a manner that reflects badly on your brand it may negatively impact your brand, market position and reputation. A legally binding contract can give your business some contractual control over the influencer’s actions and therefore reduce your risk in this area.
Imposing terms that require compliance with advertising law and protect consumers. There are certain advertising standards that you need to ensure that the influencer complies with. If the influencer fails to comply with the legal and regulatory requirements for influencers this could adversely affect your brand and reputation. Having a contract in place will contractually require this compliance by the influencer and give you a course of action if they do not comply.
Contracts are important, even for micro-influencers or nano-influencers who will be committing to short term or one-off projects. There are important legal considerations in even the most rudimentary influencer deal, such as compliance with advertising law, the licensing or assignment of intellectual property and general contractual principles.