Ultimate Guide to VAT on Digital Services for UK Business

Understanding VAT on digital services rules is essential for UK businesses offering digital services within the UK, with UK regulations enforced by HMRC. UK businesses providing digital services in the EU or other countries with a VAT system may also need to register for VAT in those places of service and comply with their VAT rules. 

This guide explains VAT (value added tax) in general, digital services VAT, what constitutes a digital service for VAT in the UK, VAT on digital services B2B and B2C, UK rules for customer place of location for VAT on digital services, and Digital Services Tax (DST). This article is not to be relied on as tax advice—contact the HMRC or other VAT tax authorities directly for VAT tax rule clarification that applies specifically to your business. 

A Quick Overview of VAT

VAT is a value-added tax system that registers participating businesses for a VAT number and computes tax on sales or services consumption in B2B or B2C transactions. and remits tax amounts due to the assessing government. 

In the UK, the standard VAT rate is 20%, with a 5% rate of VAT for specified goods and services and a zero rate for other items. Certain items are VAT exempt. 

Within the UK and for imports into the UK, the seller collects VAT taxes from customers after meeting a taxable turnover VAT registration threshold of £90,000, registering for a VAT number, and having a VAT effective date. VAT taxes will be due, but the seller can’t invoice them yet after registering and still waiting to receive their VAT number. Instead, HMRC recommends increasing prices to cover the VAT amount that will be payable during this waiting period. 

The UK VAT compliance system lets businesses reclaim VAT on invoiced purchases and expenses from suppliers through their international accounts payable system to offset the amount of VAT due to a country on sales of goods or services, including qualifying digital services. Each seller acts as a collection middleman, charging VAT on sales or services provided to customers and collecting customers’ VAT payments when the invoice or subscription payment is due. 

For VAT from UK businesses providing sales or services into EU (European Union) member states, the reverse charge method can be used to bill VAT on invoices but let their B2B customers pay VAT directly to the assessing government entity. As a middleman, UK businesses still need to collect VAT for B2C sales and services. 

According to Tax Foundation|Europe, VAT is assessed (for any eligible VAT supply category) in all major European countries (including those in the UK) and 170 countries worldwide. 

Is VAT Applicable on Digital Services?

VAT applies to specified types of digital services sales in the UK, the EU, and other countries with a VAT system that includes digital services. The UK VAT rate on digital services is 20%. Broadly, publications, including books, magazines, and newspapers, as well as subscription membership and TV licence fees, are VAT-exempt in the UK. 

Digital services are unique because service providers can often deliver them worldwide. Therefore, your business needs to know about VAT systems in different countries and where VAT on digital services applies for compliance. 

For example, the United States has a sales tax system with state-based rules instead of a VAT tax. Therefore, if UK businesses provide digital services (or other types of goods and services) to customers located in the US, they don’t need to charge VAT. 

In contrast, there may be UK VAT on digital services from the USA for UK customers. US companies providing digital services to UK customers may also be subject to a different Digital Services Tax in the UK, although that tax law is still effective and if the company meets the larger threshold for DST. 

What are Considered “Digital Services”?

In the UK, HMRC provides guidance on “VAT rules for supplies of digital services to consumers” to cover the rules for private consumers and some businesses without UK VAT registration numbers or other “business” proof. 

Digital services for which VAT is levied (as an indirect tax) in the UK are: 

• Radio and television broadcast services
• Telecommunications services
• All electronically supplied services (e-services or electronic services) are delivered over the Internet or an electronic network with minimal or no human intervention.

HMRC defines these e-services for VAT as either:

• “where the sale of the digital content is entirely automatic, for example, a consumer clicks the ‘Buy Now’ button on a website and either the:
  • content downloads onto the consumer’s device
  • the consumer gets an automated email containing the content
• where the sale of the digital content is essentially automatic, and the small amount of manual process involved does not change the nature of the supply from an e-service.”

The HMRC gives some examples of e-services NOT classified for VAT as digital services because too much human intervention is involved in delivering and providing these e-services:

• A PDF document emailed by the seller’s staff (instead of automatically emailed by their system or automatically downloaded)
• Live webinar
• An online course consisting of pre-recorded videos and downloadable PDFs plus support from a live tutor 

In the last example, only the use of a live tutor in the course results in this type of service not being classified as digital services for VAT. Because determining digital services or non-digital services may be difficult, your business may contact HMRC for help. 

You also need to decide if the supplies provided should be considered as a single bundle or taxed for VAT as multiple supplies. 

HMRC “Examples of a bundled supply include a:

• technical journal with supplementary online content
• DVD with access to online streaming of content
• music CD with digital download.”

How Does VAT on Digital Services Work?

VAT on digital services (excluding e-services with too much human intervention) applies the standard 20% UK VAT rate to consumers located in the UK or another VAT system rate in the consumer’s country of location unless the digital service falls within a generally VAT-exempt category. 

A separate UK VAT on digital services began in January 2021, after the UK exited the European Union through Brexit on January 31, 2020. For VAT on digital services after Brexit, B2B (business-to-business) transactions are still VAT-applicable in the place of location for all types of services supplied, along with B2C (business-to-consumer) transactions that have more specific UK rules for digital services. 

UK VAT rules for digital services supplied to businesses cover B2C transactions with consumers and can also apply to certain businesses for which sales are then classified as B2C. 

Digital service business customers that don’t provide a VAT registration number (VAT number) to your business can optionally be checked as to their business status in certain other ways. But without proof of business status, supplying digital services to them should be treated as business to consumer (B2C) instead of as B2B, meaning these UK VAT digital services rules for consumers apply. 

If digital services are provided through a marketplace digital platform (excluding a digital platform only for payment processing), then the marketplace is responsible for VAT accounting and VAT tax compliance instead of the actual seller of those digital services. 

How to Identify Your Customer’s Location

For VAT on cross-border digital services originating in the UK, your customer’s location is generally where the B2C customer resides, resulting in VAT assessment by that country. But in certain circumstances relating to how the digital service is supplied, place of supply rule presumptions can be used instead to determine the VAT taxing jurisdiction. 

According to the HMRC VAT rules: 

“Types of supplies covered by the presumption rule include where the digital service is supplied:

• through a telephone box, a telephone kiosk, a wifi hotspot, an internet café, a restaurant or a hotel lobby (VAT will be due where those places are actually located, so if a German tourist makes a call from a telephone box in the UK, VAT will be due in the UK)
• on board transport travelling between different countries (VAT will be due in the place of departure, for example, if a ferry operator provides a wifi hotspot on board ship which is available to passengers for a fee, VAT will be due in the place of departure and will not depend on a passenger’s place of residence)
• through a consumer’s telephone landline (VAT is due where the consumer’s landline is located)
• through a mobile phone (the consumer location will be the country code of the SIM card, so if a UK resident downloads an app to their smartphone while on holiday in Italy, VAT will be due in the UK)
• in the country for the postal address where the decoder is located or the viewing card is sent (if a UK resident has a satellite television system in their Spanish holiday home, VAT will be due in Spain)”

Supply Rules Specific to Place of Location

UK VAT is applicable to digital services supplied to consumers within the UK. When UK-based businesses sell digital services to consumers in other countries, VAT may instead be assessed under the rules of those EU member states or other VAT countries. 

The European Council of the EU has created new VAT rules for small businesses that will go into effect on January 1, 2025 for enterprises in its member states. According to these rules, the EU will set a threshold for VAT not to exceed €85,000 in annual turnover and simplify rules for small business VAT compliance by EU companies. 

When your UK-based business provides digital services to EU customers, it should check to see if it is eligible for the VAT Mini One Stop Shop (MOSS) scheme. Small businesses are more likely to qualify for MOSS because they are less likely to have an EU branch location. Qualification for the MOSS scheme enables becoming VAT-registered with tax authorities, filing VAT returns, and making VAT payments in one EU country rather than in each applicable EU country. (Within the  MOSS acronym, One Stop Shop is abbreviated as OSS.) 

According to the linked European Union’s Your Europe website page:

“If you supply cross-border telecommunication, television and radio broadcasting, or digital services to non-taxable persons, you may be eligible for the scheme. Services covered under the MOSS scheme include:

• website hosting
• supply of software
• access to databases
• downloading apps or music
• online gaming
• distance teaching”

VAT MOSS has two schemes for eligibility, one for EU businesses and another for non-EU businesses:

• “the union scheme, for businesses established in the EU or with at least one branch based in an EU country
• the non-union scheme, for businesses not established in the EU and without any branches based in the EU”

Selling Digital Services in the UK vs Globally

Determining the place of location of the consumer for receiving digital services is essential for assessing VAT in their country or EU member state. The OECD is also spearheading a project called Pillar One to assess taxes in the country where customers are located, eventually replacing any OECD member country’s existing Digital Services Tax with a new location-based tax method. This pending change applies to under 10 of its member countries that currently have a DST. 

Which Countries Have Digital Services Tax?

Countries may have both a VAT tax on digital services tax and a separate Digital Services Tax (DST) with different rules, threshold amounts, and tax rates. 

Countries with Digital Services Tax (DST)

OECD countries with a Digital Services Tax that may be phased out effective June 2024 for Pillar One replacement (to pay income taxes where customers are located), include the United Kingdom, Austria, France, Italy, Spain, Tunisia, and Turkey. India has an Equalisation levy on online advertisement services and an Equalisation levy on e-commerce that may be similar to a Digital Services Tax. 

Besides VAT on digital services (which is different than DST), the UK also initiated an interim Digital Services Tax (DST) in April 2020 at a tax rate of 2% of turnover for large digital “business groups whose revenues from in-scope activities are more than £500 million and where more than £25 million is derived from UK users.” The purpose of the DST is “to capture the value added to major digital businesses by UK users interacting with online marketplaces, social media platforms and search engines.”  

Countries with VAT 

Your UK business can research which countries besides the UK and EU have VAT on digital services, for which you may need to adhere to VAT requirements. The following two sources are a starting point that lists VAT countries, although they aren’t narrowed down to indicate whether these countries include VAT for digital services. 

HMRC provides guidance on EU country codes and their VAT number formats and lists which countries aren’t included in the EU VAT area. GVC (Global Tax Compliance) provides a list of all countries in the world that have VAT.

Summing It Up

Following is a recap of this article and how automation software will help your business more accurately reclaim VAT on its purchases of goods and services. 

Key Highlights of VAT on Digital Services 

VAT on digital services is assessed by the country in the place of location of the consumer receiving the digital services for B2C transactions, according to UK VAT rules. (B2B transactions still follow the VAT rules for general services.) The HMRC classifies businesses without a VAT registration number or other optional methods for sellers to check their status as a business as B2C transactions that follow the VAT on digital services rules for consumers. 

This digital services VAT rule means that UK businesses may need to register for VAT in those countries where consuming customers are located and follow the digital services VAT laws of those countries. The EU also has a VAT tax on digital services and may offer your business a one-stop shop MOSS option for using only one VAT member state in the EU for all EU VAT purposes. 

To qualify as a digital service, e-services provided over the Internet or other electronic networks must include at least a minimal amount of human intervention in delivery or the type of service provided. TV and radio broadcasting and telecommunication are other VAT-eligible methods of digital service delivery. 

In addition to VAT, certain countries, including the UK, have established a Digital Services Tax that will be replaced by an OECD-compliant tax system using the place of customer location after a phase-out period. 

How to Reclaim VAT on Goods and Services

To reclaim VAT on goods and services purchased and reduce the amount payable to VAT-assessing governments, your business needs to verify that VAT numbers provided by suppliers on invoices are accurate. 

With a unified finance automation digital platform that works with your ERP system or accounting software, Tipalti provides Procurement software and VAT tax compliance for accounts payable invoices and mass payments. Tipalti automation software also checks for OFAC/SDN blacklist compliance that includes the United Kingdom’s Consolidated List of Financial Sanctions Targets. Explore more about UK and EU VAT tax compliance features provided by Tipalti automation software.