VAT on Digital Services: What UK Businesses Need to Know

What Counts as a Digital Service?

HMRC defines electronically supplied services (digital services) as services delivered over the internet or electronic network that are essentially automated. This includes:

• Downloaded software and apps
• E-books and digital publications
• Music and video streaming or downloads
• Online gaming
• Cloud storage and SaaS subscriptions
• Website hosting
• Online courses and webinars (automated, not live)
• Digital advertising services
• Stock images and digital design assets

What doesn't count: Live teaching or consultancy delivered via video call is not an electronically supplied service — it's a standard service that happens to use the internet. The distinction is between automated delivery (digital service) and human-delivered service via digital means.

Selling to UK Customers

B2B (Business to Business)

Digital services supplied to UK VAT-registered businesses are standard-rated at 20%. Straightforward — the same as any other taxable service.

B2C (Business to Consumer)

Digital services to UK consumers are standard-rated at 20%. Again, straightforward within the UK.

Selling to Overseas Customers

This is where it gets more complex.

B2B (Business to Business Overseas)

For B2B digital services to customers outside the UK, the place of supply is where the customer belongs. This means:

• No UK VAT is charged
• The overseas business accounts for VAT in their own country (reverse charge)
• Your invoice should state "Reverse charge applies"

You need to verify that your customer is genuinely a business — their VAT registration number is the standard proof.

B2C (Business to Consumer Overseas)

For B2C digital services, the place of supply is where the consumer is located. This means:

• You may need to charge the local VAT rate of the consumer's country
• For EU consumers, the One-Stop Shop (OSS) scheme allows you to register in one EU country and account for VAT across all EU member states
• For non-EU consumers, the rules vary by country

The UK-EU threshold: Since Brexit, UK businesses selling digital services to EU consumers may need to register for VAT in the EU (or use the non-Union OSS scheme) if sales exceed the relevant thresholds.

Practical Implications for Common Digital Businesses

SaaS Companies

If you sell software subscriptions, your UK customers pay 20% VAT. Business customers overseas are reverse-charged. Consumer customers overseas may require you to charge their local VAT rate.

Online Course Creators

If your course is pre-recorded and automated, it's a digital service. Live-taught courses are standard services — different place-of-supply rules may apply.

App Developers

If you sell through the Apple App Store or Google Play, the marketplace handles VAT collection for B2C sales. You receive payment net of VAT. For B2B sales or direct sales through your own website, you handle VAT yourself.

Digital Download Sellers

E-books, music, images — if sold digitally, they're digital services. Physical delivery of the same content (printed book, CD) follows different VAT rules (books are zero-rated in the UK).

Record-Keeping

For digital services, keep records of:

• Customer location (billing address, IP address, bank country)
• Whether the customer is a business or consumer
• The VAT rate applied and the reason
• Any OSS registrations and returns

With Accounted, Penny categorises digital service income correctly and applies the right VAT treatment based on your customer's location and status.

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