Web Hosting Resellers — Tax on Digital Services Guide

Reselling web hosting is one of those businesses that can start as a side project and grow into something substantial. You buy server space wholesale from a provider, package it with your own branding and support, and sell it to your clients — often alongside web design, development, or digital marketing services. The margins can be decent, and the recurring revenue model is attractive.

But the tax side of web hosting reselling has some quirks that other businesses don't face, particularly around VAT on digital services and the treatment of recurring income. This guide covers everything you need to know for the 2025/26 tax year.

Getting Registered

If you're running a web hosting reselling business, even as a side venture, you need to register as self-employed with HMRC. This applies whether you're operating as a sole trader or have formed a limited company.

As a sole trader, registration is quick and free. You'll get a UTR (Unique Taxpayer Reference) number and will need to file a Self Assessment tax return each year.

It's also worth noting that if you're providing hosting services alongside other digital services (web design, SEO, etc.), all of that income gets lumped together for tax purposes. You don't need separate registrations for different types of work — it all goes on one tax return.

Understanding Your Tax Position

For the 2025/26 tax year, the income tax rates for sole traders are:

• Personal allowance: £12,570 (no tax on income up to this amount)
• Basic rate: 20% on profits from £12,571 to £50,270
• Higher rate: 40% on profits above £50,270

National Insurance contributions are:

• Class 2 NI: £3.45 per week
• Class 4 NI: 6% on profits between £12,570 and £50,270

Your tax is calculated on your profit — total income minus allowable business expenses. For web hosting resellers, the cost of purchasing wholesale hosting is your biggest expense and directly reduces your taxable profit. If you buy £500/month of server space from your provider and sell it for £1,500/month to your clients, you're taxed on the £1,000 monthly profit (minus your other expenses), not the full £1,500.

Our sole trader tax guide walks you through the calculation in more detail.

VAT on Digital Services — The Big One

VAT is where web hosting resellers need to pay close attention. The rules for digital services are different from many other businesses, and getting them wrong can lead to penalties.

The basics. You must register for VAT if your taxable turnover exceeds £90,000 in any rolling 12-month period. Our VAT registration threshold guide explains this in detail.

What counts as a digital service? Web hosting, domain registration, email hosting, cloud storage, and similar services are classified as "electronically supplied services" for VAT purposes. This classification matters because of how VAT is applied to international customers.

Selling to UK customers. If you're selling hosting to UK-based customers, VAT treatment is straightforward — you charge 20% VAT (once you're VAT registered) regardless of whether the customer is a business or an individual.

Selling to EU/international business customers (B2B). When you supply digital services to a business customer outside the UK, the service is outside the scope of UK VAT. The customer accounts for the VAT in their own country under the reverse charge mechanism. You need to check your customer has a valid VAT number and keep evidence that they're a business.

Selling to EU/international individual consumers (B2C). This is where it gets interesting. When you supply digital services to individual consumers in the EU, you need to charge VAT at the rate applicable in the customer's country, not the UK rate. You can do this through the UK's VAT One Stop Shop (OSS) scheme, which allows you to make a single return covering all your EU consumer sales rather than registering for VAT in each EU country separately.

If you have a significant number of international customers, especially individual consumers, it's worth getting proper advice on your VAT obligations. The rules in this area are genuinely complex.

Recurring Revenue and Cash Basis Accounting

One of the attractive aspects of web hosting reselling is recurring monthly income. From a tax perspective, how you account for this depends on whether you use the cash basis or accrual (traditional) basis of accounting.

Cash basis. Most sole traders use the cash basis, which means you record income when you receive it and expenses when you pay them. This is simple and works well for hosting resellers — monthly payments from clients are recorded as income in the month received, and your wholesale hosting costs are recorded as expenses when you pay your provider.

Accrual basis. Under accrual accounting, you'd record income when it's earned (i.e., when the hosting service is provided) rather than when payment is received. This can create timing differences if clients pay in advance or arrears. For most small hosting resellers, the cash basis is simpler and perfectly adequate.

One thing to be aware of: if a client pays annually in advance for hosting, under the cash basis, you'd record the full annual payment as income in the year you receive it. This could push your income — and therefore your tax bill — higher in that particular year.

Expenses You Can Claim

Web hosting resellers can claim a variety of business expenses:

Wholesale hosting costs. The amount you pay your hosting provider for server space, bandwidth, and related services is your primary business expense.

Domain registration fees. If you purchase domains for resale or for your own business, these costs are deductible.

Software and tools. Control panel licences (cPanel, WHM, Plesk), billing software (WHMCS, Blesta), monitoring tools, backup services, and SSL certificates are all deductible.

Support tools. Helpdesk software, live chat tools, and ticketing systems used to support your hosting clients.

Marketing. Website costs, Google Ads, social media advertising, content marketing, and any other promotional expenses.

Home office costs. If you work from home, you can claim a proportion of your household costs or use the simplified flat rate. Our guide on working from home expenses covers this in detail.

Hardware. Computers, monitors, networking equipment, and other hardware used for your business. If an item is used partly for personal purposes, you claim only the business proportion.

Professional development. Training courses, certifications (like AWS or cPanel), and conference attendance related to your hosting business.

Insurance. Professional indemnity insurance is particularly important for hosting resellers — if a client's site goes down due to a server issue, you could face a claim. This insurance cost is fully deductible.

Accounting and legal fees. The cost of Accounted or other accounting software, plus any accountant or solicitor fees, are deductible.

For the full list, see our complete guide to sole trader expenses.

Managing Client Payments and Bad Debts

Hosting resellers often deal with clients who pay monthly, and occasionally you'll encounter non-payment. Here's how to handle it:

Late payments. Under the cash basis, if a client hasn't paid, you haven't received income, so there's no tax to pay on money you haven't collected. This is one advantage of cash basis accounting.

Bad debts. If you've provided hosting and the client simply won't pay, you can write off the bad debt. Under the cash basis, since you never recorded the income, there's nothing to write off. Under accrual accounting, you'd record the income and then claim a bad debt deduction.

Automated billing. Most hosting resellers use automated billing systems that charge clients monthly. This creates a steady stream of transactions. Using Penny — the AI assistant in Accounted — to automatically categorise these recurring payments can save significant time, particularly as your client base grows.

Scaling Up — When to Consider Limited Company Status

As your hosting business grows, there comes a point where operating as a limited company can be more tax-efficient than being a sole trader. The general rule of thumb is that once your profits consistently exceed £30,000–£40,000, it's worth talking to an accountant about incorporation.

The benefits of a limited company include:

• Corporation tax at 25% (or 19% for small profits) on company profits, which can be lower than higher-rate income tax
• The ability to pay yourself through a combination of salary and dividends, which can be more tax-efficient
• Limited liability protection (your personal assets are separate from the business)

The downsides include more admin (annual accounts, Companies House filings), the requirement to have a registered office address, and the loss of direct access to business profits (everything belongs to the company, not you personally).

For most small hosting resellers, sole trader status is simpler and perfectly adequate. But if you're growing quickly, don't dismiss incorporation.

Record Keeping and Digital Requirements

HMRC requires you to keep records for at least five years. For hosting resellers, key records include:

• Client invoices and payment records
• Provider invoices for wholesale hosting
• Bank statements
• VAT records (if VAT registered), including evidence of customer location for digital services
• Receipts for all business expenses

Making Tax Digital for Income Tax starts from April 2026 for sole traders with income over £50,000. If you're above this threshold, you'll need to submit quarterly digital updates to HMRC. Accounted is designed to make this straightforward, connecting to your bank account and keeping your records MTD-compatible.

Related Reading

• Car Valets and Detailers — Self-Employed Tax Guide

• Locum Pharmacists — Tax, Expenses, and IR35 Guide

• Food Truck and Street Food Vendors — Tax and Expenses Guide

• VAT Registration Threshold Guide

• Cash Basis vs Accrual Accounting

• Work from Home Expenses 2025/26

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