A guide to VAT for digital services

Navigating the world of online business can be complex, and Brexit has made it even more important to stay up to date with tax changes.

As a small business owner, this guide is designed to provide you with a clear understanding of how digital services are defined and ensure you comply with VAT regulations.

In this article, we also break down the different rules that apply depending on whether you supply digital services within the UK or to overseas customers.

Here’s what we cover:

• What is VAT?
• What are considered digital services?
• How is UK VAT applied to digital services?
• Place of supply rules for digital services
• EU VAT on digital services supplied to EU customers
• How to determine your consumer’s location
• Examples of services supplied to EU customers
• Final thoughts on digital services

What is VAT?

Value Added Tax (VAT) is a consumption tax added to most goods and services sold by VAT registered businesses in the UK (and many other countries too).

VAT is defined as an indirect tax because the business (the seller) pays the tax to the government rather than the person who ultimately bears the financial cost of the tax (the consumer).

As a UK business, you must register for VAT if your VAT taxable turnover is more than £85,000. You can also choose to register if your turnover is below the £85,000 threshold.

VAT on services provided outside of the UK has changed from January 2021 with Brexit, and now the UK and the European Union (EU) has separate VAT systems.

There are a number of scenarios where, based on place of supply rules, a UK business might have to charge, collect and remit EU VAT.  

Selling digital services to EU consumers is one of these scenarios.

What are considered digital services?

Broadly, a digital service is a sale delivered over the internet with no or next to no human intervention, and with a high degree of automation.

This means the digital sale must be either:

• Entirely automatic, for example, a consumer clicks ‘buy now’ on the website and the content downloads onto their device,
• Or, basically automatic, because the small amount of manual process involved doesn’t change the nature of the supply from an e-service.

Some examples of digital content include images, text, e-books, PDF files, music, films, games, online magazines, apps, software and software updates, website supply and advertising space on a website.

Using the internet to communicate or facilitate a sale doesn’t always mean that a business is supplying digital services. For example, lawyers and consultants who advise clients through email or provide professional courses where the content is delivered by a teacher over the internet.

HMRC provided the following examples to illustrate what they do and do not consider to be a digital service:

Digital service

• An automatic email from the seller containing a PDF document
• Stock photographs available for automatic download
• Online course consisting of pre-recorded videos and downloadable PDFs
• Link to online content or download sent by manual email.

Not a digital service

• A PDF document manually emailed by seller
• Live webinar
• Online course consisting of pre-recorded videos and downloadable PDFs plus support from a live tutor
• Individually commissioned content sent in digital form, e.g. photographs, reports, medical results.

There are also radio and TV broadcasting services, and telecommunications to consider too.

This is a fast-changing area, so we recommend you contact HMRC if you’re not sure whether your supplies are digital services or not.

How is UK VAT applied to digital services?

If you are a UK business that supplies digital services to UK customers then those supplies are liable to UK VAT.

The standard VAT rate of 20% is typically applied to the sale of digital services.

However, special VAT rules apply to publications, with certain electronically supplied publications being eligible for a zero rate of VAT.

The following electronically supplied products are entitled to this zero rate of VAT:

• Books
• Journals and periodicals (including magazines)
• Booklets
• Children’s picture books
• Brochures
• Newspapers
• Leaflets
• Pamphlets

Here’s a list of exclusions that must apply the 20% VAT rate:

• E-publications where more than half of the publication is devoted to advertising, audio or video content
• Audiobooks (this zero rate of VAT only applies to electronic versions of books that can be read or looked at)
• Supplies of intellectual property
• Architectural and engineering drawings or plans – even if supplied electronically

If you supply digital services to customers via a third party marketplace or platform, then the digital platform is responsible for accounting for VAT on the supply instead of you.

So if you supply digital services to consumers through a gateway, internet portal or marketplace you need to determine whether you’re making the supply to the customer or to the platform operator.

The platform operator is the one supplying the customer (and therefore responsible for accounting for the VAT payment that’s charged to the customer) if the platform operator sets the general terms and conditions, authorises payment or is responsible for the delivery or download of the digital service.

Place of supply rules for digital services

The following rules will only apply to your business if you supply digital services to customers outside the UK.

Digital services are deemed supplied where the customer is located, so digital services supplied to customers outside the UK are not liable to UK VAT.

But they may still be liable to VAT in the country where the customer is based.

To correctly identify the VAT treatment of cross-border supplies, you need to know whether you’re supplying to a business or to a private consumer:

• If you supply to a business, it will be a B2B (Business to Business) transaction.
• If you supply to a private consumer, it will be a B2C (Business to Consumer) transaction. This includes supplying services to a business for non-business / private use.

If the customer provides their VAT number then they should be treated as a business customer.

If they don’t provide a VAT number then they must be treated as a private consumer, unless they can supply alternative evidence to prove they are a registered business and should be treated as a business customer.

EU VAT on digital services supplied to EU customers

If you are supplying a B2B digital service to an EU business customer, the customer is liable to pay VAT via reverse-charge in their country (this means the business buying the services declares both the output and input VAT).

You as the UK business have no EU VAT obligations, and the supply is not subject to UK VAT.

If you are supplying a B2C digital service to an EU private consumer, your business has to charge, collect and remit EU VAT to the tax authority of the country where the customer resides.

For example, I sell digital services to a consumer in France. I need to charge and collect French VAT at the relevant rate in France and remit this to the French tax authorities.

And unlike the UK VAT system where there is an £85,000 threshold for VAT registration, there is currently no threshold for EU VAT and the liability is incurred after the first supply regardless of value.

However, this is set to change in January 2025 under a new EU directive, simplified VAT rules for SMEs.

If your business supplies a B2C digital service to an EU consumer you can pay EU VAT in one of two ways:

• Register for VAT in each EU member state where you supply digital services to consumers
• Register for the OSS (One-Stop Shop) scheme in an EU country of your choice.

How to determine your consumer’s location

The location of your consumer is determined by where the consumer usually lives, for example, for a UK expat living in France the location would be France.

You must get and keep evidence to prove which country your consumer usually lives.

Here are some examples of the types of supporting evidence that tax offices will accept:

• Your consumer’s billing address
• Your consumer’s bank details
• Your consumer’s SIM card country code
• The IP address of your consumer’s device
• Your consumer’s landline telephone location if the service is supplied through fixed landline
• Other commercially relevant information – for example, a product code which electronically links the sale to a particular location.

To try to simplify the rules for certain digital services, you can make a presumption about the place where the supply is to be taxed, meaning you don’t need to know the country where the consumer of the digital service usually lives.

HMRC has determined the presumption rule can be applied in the following circumstances where the digital service is supplied:

• At a hotel lobby, restaurant, through a Wi-Fi hotspot, or through a telephone box or kiosk. In these cases VAT is due where those places are actually located, for example, if a French tourist purchases software on their laptop using a Wi-Fi hotspot in London, then VAT will be due in the UK.
• On board transport travelling between countries. In this case VAT is due in the place of departure, for example if a UK resident purchases a Wi-Fi hotspot on board a cruise ship departing Spain, then VAT will be due in Spain.
• Through a consumer’s landline telephone. VAT is due where the consumer’s landline is located.
• Through a mobile phone. In this case VAT is due according to the country code of the SIM card, for example, if a UK resident downloads an app to their smartphone while on holiday in Germany, VAT will be due in the UK.
• By post for viewing cards or where the digital decoder is located. In this case VAT is due where the postal address is located, for example, if a UK resident has a Sky box in their Spanish holiday home, VAT will be due in Spain.

Examples of services supplied to EU customers

It’s important to note the following examples below affect supplies by a UK business to EU customers only.

For any digital services supplied by a UK business to a UK business or consumer, the normal £85,000 VAT threshold applies.

Live-streamed class

• B2B (EU business customer) – Not a digital service.
• B2C (EU private consumer) – Not a digital service.

Recorded class, no live content

• B2B (EU business customer) – No UK or EU VAT obligations by UK business. Customer pays VAT by reverse-charge in their own country.
• B2C (EU private consumer) – VAT due in EU with no threshold. No UK VAT obligations.

E-book downloaded automatically from website or automated email link

• B2B (EU business customer) – No UK or EU VAT obligations by UK business. Customer pays VAT by reverse-charge in their own country.
• B2C (EU private consumer) – VAT due in EU with no threshold. No UK VAT obligations.

E-book sold manually

• B2B (EU business customer) – Not a digital service.
• B2C (EU private consumer) – Not a digital service.

Final thoughts on digital services

As the digital economy continues to evolve, staying informed about VAT obligations is essential for digital businesses and consumers alike.

By grasping the fundamental principles of VAT, understanding the distinctions between digital and other services, and staying up-to-date with legislative changes, you can ensure compliance as well as make informed decisions that contribute to the growth and success of your business.

Armed with this knowledge you’re now equipped to supply e-services with confidence.