vat on digital services
For growing UK tech and SaaS companies, getting VAT on digital services right is not just about knowing the 20% UK rate. You need to understand where it is due, what evidence you should collect and when an overseas sale creates an additional compliance requirement.
In this article, we walk you through what counts as a digital service, the rates and thresholds you need to know, how selling to businesses differs from selling to consumers and where we most often see UK digital companies make mistakes.
Key Takeaways
- VAT on digital services is charged based on where your customer is, not where your business is based.
- Most digital sales to UK consumers carry the standard 20% rate, though some digital publications are zero rated.
- UK businesses get a £90,000 registration threshold, but overseas sellers of digital services to UK consumers must register from their very first sale and the same applies in reverse when you sell into the EU.
- When selling to a VAT registered business in another country, the reverse charge usually applies so you do not add VAT yourself, but UK VAT is still required on UK business sales.
- Since Brexit, UK businesses can no longer use VAT MOSS for EU sales and instead register for the EU’s non-Union OSS scheme or register in each EU country separately.
What counts as a digital service for VAT?
HMRC does not treat every service you sell online as a digital service. The key test is whether the service is supplied electronically and delivered automatically, or largely automatically, with minimal human involvement.
For your business, the important question is not simply whether your customers use the internet to buy something. You need to look at how the product or service reaches them after the sale.
Common digital services
Digital services can cover a wide range of products and services that you provide online. Some of the most common examples include:
- SaaS subscriptions and software downloads
- Mobile apps and streaming services
- Web hosting and digital content
- Online courses and recorded training
For example, if your customers subscribe to your SaaS platform and get instant access without anyone manually setting up their account, it would generally be considered as a digital service. The same can apply to content such as automatically delivered PDFs, recorded courses and other digital products.
The way you deliver your service is what matters most. If your customer gets it online automatically, without much input from your team, it will usually be classed as a digital service for VAT purposes.
When an online service may not count as a digital service?
Selling a service online does not always mean it is treated as a digital service for VAT. The amount of work you or your team put into delivering the service can affect how HMRC treats it. For example, a live course with a tutor, advice given by email or work created specifically for one customer may not fall under the digital services rules.
This is worth checking if your service includes software along with training, consultancy or personal support. In these situations, the VAT treatment can depend on what you are actually providing to the customer.
Understanding the UK’s VAT rate on digital services
Most digital services supplied to UK consumers are standard-rated at 20%, though the exact rate depends on the type of service (as shown in the table below). HMRC’s place of supply guidance confirms that digital services supplied to UK consumers are subject to UK VAT.
Digital Services and VAT Rates
| Type of digital service | Typical VAT treatment |
|---|---|
| SaaS subscriptions, software licences and apps | Standard rate (20%) |
| Streaming, gaming and pre-recorded online courses | Standard rate (20%) |
| E-books, digital newspapers and journals | Zero rate (0%) |
| Audiobooks | Standard rate (20%) |
| Live, tutor-led online courses | Treatment can differ depending on how the service is supplied |
Under current GOV.UK VAT registration rules, a UK-established business must register when taxable turnover exceeds £90,000, or when it expects to exceed that amount within the next 30 days.
The VAT treatment depends on what you sell and how the service is supplied, so it is worth checking each digital product rather than applying the same rate across your entire offering.
Why VAT depends on where your customer is, not where you are?
When you sell digital services to customers in different countries, one of the first things you need to establish is where the customer actually belongs, as this can affect which VAT rules apply to the sale.
HMRC refers to this as the place of supply and it becomes particularly important for SaaS businesses and other companies that sell online services to customers outside the UK.
To work out where your customer is based, you may need to collect information such as their:
- Billing or home address
- IP address
- Bank details
- SIM card country code
In some cases, you may need two pieces of non-conflicting evidence. For a growing SaaS business, collecting the right information when the customer signs up is much easier than trying to reconstruct it when a return is due.
How does HMRC digital services VAT work for B2B and B2C sales?
VAT can work differently depending on whether your customer is a consumer or a business. So, when someone signs up for your service, it is important to know who they are buying from and where they are based.
B2C digital services
Digital services supplied to UK consumers are liable to UK VAT. If you are VAT registered and your service is standard rated, you would normally charge 20%.
For consumers outside the UK, the customer’s location becomes more important. You may need to follow the VAT or indirect tax rules in their country instead.
B2B digital services and the reverse charge
When you sell digital services to a business in another country, you will usually need to look at where that business is based. If the customer is outside the UK, you would normally not add UK VAT to the invoice. Instead, the customer may need to pay the VAT in their own country through the reverse charge.
It is also important not to write “0% VAT” just because you have not charged. A sale that is outside the scope of UK VAT is different from a sale that has a 0% rate.
You should also keep some proof that your customer is a real business. A VAT registration number is one way to show this, but HMRC may accept other business details as evidence too.
B2B vs B2C VAT at a glance
| B2C – Consumer | B2B – Business | |
|---|---|---|
| UK customer | Usually charge UK VAT | Usually charge UK VAT |
| Overseas customer | Local VAT may apply | Reverse charge may apply |
| Main check | Customer’s location | Business status and location |
| VAT number | Usually not needed | Useful for confirming business status |
| VAT records | Keep evidence of customer location | Keep evidence of business status and location |
How does VAT apply when you sell to customers abroad?
When you start selling digital services to customers in other countries, it can become harder to manage because the rules can change. Getting this right from the start can save you from having to correct invoices or VAT records later.
If you are expanding into new markets, getting advice from tech accounting services can also help you understand the tax and accounting requirements that may come with your international sales.
Typical VAT treatment:
| Customer | Typical VAT position |
|---|---|
| UK consumer | UK VAT normally applies |
| UK business | Normal UK VAT rules usually apply |
| Overseas business | UK VAT may not apply and the customer may account for VAT locally |
| EU consumer | VAT is generally due in the customer’s country |
| Consumer outside the UK and EU | UK VAT may not apply, but local tax rules should be checked |
These are general starting points. Some services have different rules, so it is worth checking the position before you start selling into a new country.
For a growing tech business, overseas VAT can become relevant sooner than expected. You do not need an office abroad before another country’s VAT, GST or similar tax rules may apply.
As you expand into new markets, getting the right tech accounting services in place can help you keep your finances and tax requirements on track.
EU VAT compliance for UK SaaS companies
Since Brexit, UK businesses can no longer use the UK’s VAT MOSS system for digital services sold to EU consumers. The European Commission’s One Stop Shop (OSS) guidance explains the current rules and the options available to businesses selling across the EU.
As a UK SaaS business, you generally have two main options:
- Use the Non-Union OSS scheme to report eligible EU consumer sales through one EU member state.
- Register for VAT separately in each EU country where you need to account for VAT.
For many businesses, the Non-Union OSS can make EU VAT reporting simpler because you can report eligible sales through one system instead of managing several separate VAT registrations.
Where do UK SaaS and subscription businesses most often go wrong on VAT?
Most VAT problems in SaaS businesses come from applying the wrong treatment at checkout or collecting too little customer information.
Common mistakes include:
- Treating all overseas customers the same: A business and a consumer may need different VAT treatment.
- Not collecting enough customer details: Your billing system should record where the customer is based and whether they are buying as a business.
- Calling every overseas sale zero-rated: A sale that falls outside UK VAT is not the same as a zero-rated UK sale.
- Assuming your payment platform handles VAT: Some marketplaces may deal with VAT as the “deemed supplier”, but a payment processor (like Stripe or PayPal) does not automatically take responsibility for it.
- Checking VAT only at return time: Problems are easier to fix when the sale happens than after hundreds of invoices have been raised.
For your business, the best approach is to build VAT checks into your billing process. As your customer base grows, having the right information from the start makes VAT reporting much easier.
Building VAT into your digital growth strategy
VAT on digital services is not a box you tick once and forget. It shifts as your customer base grows, as you launch new products and as the platforms and marketplaces you sell through change their own terms.
At Rise Accounting, we work with SaaS, ecommerce and subscription businesses to build VAT into the way they price, sell and report from the outset. Our tech accountants can also help you manage the accounting needs that come with running a technology-focused business.
Talk to our experts for help with your digital services VAT.
Frequently asked questions
Does the £90,000 VAT threshold apply to digital services?
The £90,000 registration threshold applies to UK-established businesses when calculating taxable turnover for UK VAT registration. Different rules apply to non-established businesses supplying into the UK, so overseas suppliers should not rely on the same threshold.
Do I charge VAT on monthly SaaS subscriptions?
A standard SaaS subscription supplied where UK VAT is due will normally be subject to the 20% standard rate. For your overseas customers, you also need to consider their location, business status and the place of supply.
Do overseas digital businesses need to register for UK VAT?
A business established outside the UK may need to register for UK VAT when it makes taxable supplies in the UK, regardless of the normal £90,000 threshold. HMRC specifically excludes non-established taxable persons from the standard registration threshold.
What evidence do I need to prove where a digital customer is located?
HMRC accepts evidence such as billing information, an IP address, bank details and other commercially relevant information. Certain cross-border digital service transactions require two pieces of evidence that point to the same customer location.
Is VAT on digital services the same as Digital Services Tax?
No, VAT applies to supplies of goods and services, while the UK’s Digital Services Tax is a separate 2% tax aimed at certain revenues of large groups providing search engines, social media services or online marketplaces.
Can I use the EU One Stop Shop for my UK SaaS business?
You may be able to use the Non-Union OSS if your UK business is not established in the EU and you provide qualifying B2C services to customers in EU member states. The scheme lets you report the VAT due on eligible EU sales through one EU member state, so you do not have to register separately in every EU country for those supplies.
Are live online courses treated as digital services?
Your live online course may be treated differently from an automated online course because your involvement in delivering the lessons matters. When you teach the course yourself or provide regular support, it may not fall under the same VAT rules as content that your customers access automatically, so you need to consider how you deliver the course when working out the VAT treatment.
Matt co-founded Rise Accounting and leads the firm’s corporate finance and FinOps strategy practice. He works closely with startups and scale-ups navigating funding rounds, financial planning and investor readiness. Before Rise, Matt built deep expertise across financial modelling, cash flow management and growth-stage advisory.
