VAT on Digital Services: Where Your Sale Is Taxed, B2B vs B2C

The short answer: where your digital sale is taxed

The place of supply is the country that gets to tax a sale, and for digital services it is set by who your customer is, not by where you or your servers sit. Two questions settle almost every case: is the customer a business or a private consumer, and where do they belong? Answer those and the VAT treatment falls out.

For a business customer, the place of supply is where that customer belongs. A UK business buying your subscription is a UK supply, so you add 20% UK VAT in the normal way. An overseas business buying the same subscription is outside the scope of UK VAT, and the customer accounts for the tax in its own country under a mechanism called the reverse charge. This is the business-to-business general rule, and it is the same rule that sends most cross-border services to the customer's side of the border.

For a private consumer, digital services follow a special rule: the sale is taxed where the consumer belongs, meaning where they normally live. A UK consumer means UK VAT. An EU consumer means that country's VAT rate, collected and paid over through an EU scheme rather than to HMRC. A consumer outside both the UK and the EU, say in the United States, is usually outside UK VAT entirely. HMRC sets all of this out in its place of supply of services rules (VAT Notice 741A), which have applied in their current post-Brexit form since 1 January 2021.

If you run a UK software company and most of your growth is coming from a mix of UK, EU and international customers, the place of supply question is not a once-a-year filing detail. It decides what you invoice, what your checkout charges, and whether you owe VAT in a country you have never set foot in. Our accountants for tech startups map this out for founders before it becomes a problem in an HMRC review.

What actually counts as a digital service

A digital service, in VAT law, is a supply that is delivered electronically with little or no human involvement, and that definition is narrower than most founders assume. HMRC groups three families together under the place of supply rules: telecommunications, broadcasting, and electronically supplied services. The last of those, often shortened to e-services, is the one that catches software companies.

Electronically supplied means the sale is essentially automatic. A customer clicks buy, and the content downloads, unlocks, or arrives by an automated email with no person on your side doing anything to fulfil it. HMRC's guidance on VAT for digital services sold to consumers lists the usual suspects: downloadable software and updates, hosted applications, e-books and PDFs pulled from a site, stock images, online games, streamed music and film, online magazines, web hosting, and advertising space on a website. If that describes your product, you are almost certainly making digital supplies.

Here is the part that trips people up, and it is the single most useful thing on this page. The moment a real person is meaningfully involved, the supply usually stops being a digital service. A live webinar is not a digital service, because a human is presenting it. An online course made of pre-recorded videos and automatic PDFs is a digital service, but bolt a live tutor onto that same course and it is no longer one. A report you research and email to one client by hand is not a digital service, even though it arrives as a file.

Why does that matter so much? Because a non-digital service sold to a consumer follows the general business-to-consumer rule, which taxes it where the supplier belongs. So a UK company selling a tutor-led course to an EU consumer charges UK VAT and reports it to HMRC as normal. Automate the same course and it becomes taxable where the consumer lives, which can drag you into EU registrations you did not expect. Roughly a third of the early-stage course and content businesses we onboard have this line in the wrong place, and it changes both their pricing and their filing obligations, which is why our tech startup accounting team pins down the classification before you switch on a checkout.

Note a couple of exclusions too: physical goods ordered online are not digital services, and neither are professional services where a lawyer or consultant simply advises a client over email. Using the internet to communicate is not the same as supplying something electronically.

Selling to businesses: the general rule and the reverse charge

Business-to-business digital sales are taxed where the customer belongs, and that one sentence covers the vast majority of software sold on annual contracts. If your customer is a business, you look at where their business is established, and that country gets the tax.

When the business is in the UK, the supply is a UK supply and you charge 20% UK VAT like any domestic invoice. When the business is overseas, whether that is Dublin, New York or Sydney, the place of supply moves to their country and the sale falls outside the scope of UK VAT. You raise the invoice with no UK VAT on it, and your customer self-accounts for any VAT due in their own country under the reverse charge. VAT Notice 741A describes the reverse charge as the customer acting as if they were both the supplier and the recipient, so they put the tax on and take it off in the same return. For you, the seller, the practical point is simpler: no UK VAT, and a note on the invoice explaining why.

The evidence that makes a sale business-to-business is the customer's VAT number. If a customer gives you a valid VAT registration number, you can treat them as in business and apply the general rule. If they cannot, you generally treat the sale as one to a consumer and charge accordingly. This is why a captured, validated VAT number at checkout is worth real money: it is the difference between a clean zero-VAT cross-border invoice and an obligation to charge and remit foreign VAT.

One caution for the flip side of the reverse charge. When you, the UK business, buy digital services from an overseas supplier, such as a US analytics tool or a cloud platform, the reverse charge runs the other way and you may have to account for UK VAT on what you have bought. Those reverse-charge purchases also count toward your own UK VAT registration test, which surprises pre-registration startups. If VAT compliance is not yet something you have set up properly, our VAT returns and Making Tax Digital service handles registration, the returns, and the reverse-charge entries in one place. For the wider structural view, our tech startup accountants keep this joined up as you scale.

Selling to consumers: taxed where the consumer belongs

Business-to-consumer digital sales are taxed where the consumer belongs, which is the special rule that makes cross-border SaaS pricing genuinely fiddly. Unlike ordinary services sold to consumers, which are taxed where the supplier sits, digital services to consumers are taxed by the customer's home country.

For a UK consumer that is straightforward: if you are UK VAT registered, you charge 20% UK VAT and report it on your normal return. For a consumer outside the UK, the supply is not liable to UK VAT, but it may be liable to VAT where the consumer lives. An EU consumer means the VAT rate of their member state applies. A consumer outside the EU, such as a US buyer, generally means no UK VAT and no EU VAT, though the local rules of that country, for example US state sales tax, are a separate matter you may still need to check.

The chart below walks the full decision for a UK software company, from the first question of whether the customer is a business or a consumer, down to the VAT outcome for each branch.

Telling a business from a consumer is the practical crux, and the VAT number is the test. If a buyer supplies a valid VAT registration number, treat it as a business sale. If they do not, treat it as a consumer sale and charge the VAT due in their country. You also need to be able to show where a consumer belongs, and HMRC accepts evidence such as the billing address, the internet protocol address of the device, the consumer's bank details, or the country code of their mobile SIM. For most small digital sellers, two non-contradictory pieces of that evidence are enough.

Selling to EU consumers: the Non-Union OSS

UK businesses selling digital services to EU consumers report the VAT through the EU's Non-Union One Stop Shop, or by registering for VAT in every EU country where they have a consumer. Since the UK left the EU VAT system on 1 January 2021, the old UK VAT Mini One Stop Shop closed to UK sellers, so the OSS route is the practical one.

The Non-Union scheme exists specifically for businesses established outside the EU that supply services to EU consumers, which is exactly what a UK software company is. The European Commission's guide to the One Stop Shop confirms you pick one EU member state, register there, and file a single quarterly OSS return that covers all your EU consumer sales, applying each customer's national VAT rate. The member state you register in then forwards the tax to the others. HMRC's own collection on VAT for digital sales in the EU sets out the same two options from the UK side.

One registration, one quarterly return, one payment, versus up to twenty-seven separate VAT registrations: for most sellers the OSS is the obvious choice. It does mean charging the right rate per country, which ranges widely across the EU, so your billing system has to know each buyer's location and apply the matching rate. The infographic below shows how the same subscription splits three ways.

It is worth being clear about what the OSS is not. This is the services route, and it is a different regime from the OSS that e-commerce sellers use for physical goods. If you sell goods rather than software, our guide to the One Stop Shop for UK e-commerce sellers covers that side. For digital services, the Non-Union scheme is the one that applies.

A worked place-of-supply decision: three customers

Take the same product and put it in front of four real-feeling customers, then follow each sale to its VAT outcome. Assume a London SaaS that is UK VAT registered, selling a subscription, and treat each sale as £1,000 of net subscription revenue to keep the arithmetic clean. The customers: a Manchester marketing agency (a UK business), a Dublin consultancy (an EU business), a private developer in Berlin (an EU consumer), and a solo founder in Austin, Texas (a non-EU consumer).

Notice how two of the four sales carry no VAT from you at all, but for completely different reasons: the Dublin business shifts the tax onto itself, while the Texas consumer sits outside the whole UK and EU VAT net. Get those two confused and you either over-charge a customer who should pay nothing to you, or under-charge one who triggers an EU obligation. Both are common, and both are avoidable with the right logic wired into your billing from day one.

The £90,000 rule and the EU no-threshold trap

The UK VAT registration threshold is £90,000 of taxable turnover in any rolling twelve months, as at September 2026, and that figure governs whether you must register for UK VAT at all. Below it, and not voluntarily registered, you do not charge UK VAT on your UK sales. HMRC's guidance on when to register for VAT sets out the test, which looks back over the last twelve months and forward over the next thirty days.

Here is the trap that catches digital sellers, and it is worth reading twice. That £90,000 threshold is a UK threshold for UK taxable turnover. It says nothing about your EU consumer sales. The EU's own small-business simplification, the one that lets a seller stay in their home country's VAT system up to a modest sales figure, only applies to businesses established inside the EU. A UK company has no EU establishment, so that threshold is simply not available to you. The consequence is stark: you can owe EU VAT on your very first B2C digital sale to an EU consumer, even while you are still comfortably below the UK £90,000 line and not UK VAT registered.

In plain terms, a pre-registration UK startup selling £30,000 a year, all of it to EU consumers through an app store checkout it runs itself, may have no UK VAT duty but a live Non-Union OSS obligation from sale number one. The two systems run on separate tracks. This is the single most expensive misunderstanding we unpick for early digital companies, because the back-VAT and interest on missed EU consumer sales compounds quietly for years before anyone notices.

There is a related point on how the systems interact. Sales you report through the OSS are outside UK VAT, so they do not count toward your UK £90,000 threshold. And where a platform or app marketplace is the one setting terms, handling payment and delivering your content to the consumer, the platform is often treated as the supplier and accounts for the consumer VAT itself, which can take the obligation off your plate. Whether that applies depends on the exact contractual setup, and it is worth checking rather than assuming.

What this means for you: what to do before your next release

If you are shipping to customers in more than one country, the place of supply rules are a billing-system question first and a filing question second. The practical steps are short, and most of them are cheaper to do before launch than after.

1. Decide, in writing, whether your product is a digital service. If a human meaningfully fulfils any part of it, the answer may be no, which changes everything downstream.
2. Capture and validate a VAT number at checkout. A valid number makes a cross-border sale business-to-business and takes UK VAT off the invoice. No number means you treat it as a consumer sale.
3. Collect two pieces of location evidence for every consumer sale. Billing address, IP address, bank country or SIM country code. Store them with the transaction.
4. Wire the right rate per destination into billing. 20% UK VAT for UK, no UK VAT for overseas businesses, the buyer's national rate for EU consumers, no VAT for non-EU consumers.
5. Check your Non-Union OSS position from your first EU consumer sale, not your first £90,000. The two thresholds are unrelated.
6. Keep the evidence and the returns together. One quarterly OSS return, your normal UK VAT return, and a clean audit trail behind both.

None of this is exotic. It is a handful of decisions made in the right order, wired into your checkout once and then left to run. Left to chance, it shows up as over-charged EU consumers, an unregistered OSS position, and a back-VAT bill that has been growing in the background. LOYALS is a King's Cross firm of accountants and business consultants that runs VAT, payroll and management accounts for UK software and digital companies, and we set this logic up so your billing charges the right tax on the day you launch, not after a review. If your customer base is starting to cross borders, that is the moment to get the place of supply right.