VAT on Digital Services: What UK Small Businesses Selling Online Need to Know

Selling e-books, online courses, software subscriptions or other digital products feels straightforward, right up until you realise VAT doesn’t always work the way it does for physical goods or in-person services. Digital services follow their own “place of supply” rules, meaning the VAT that applies can depend on where your customer is, not where your business is based. Here’s what UK small businesses selling digital products and services online need to understand.

What Counts as a “Digital Service” for VAT Purposes?

HMRC defines digital services (also called “electronically supplied services”) as services delivered over the internet or an electronic network with little or no human intervention, and largely automated. Common examples include e-books and downloadable content, streaming media, online courses and webinars delivered automatically, software as a service (SaaS), apps, software downloads and updates, and website templates or digital design assets. It’s worth noting this doesn’t cover everything sold online — a live, one-to-one consulting call booked through a website isn’t a digital service in this sense, since it involves genuine human interaction, even though it was arranged digitally.

Selling to UK Customers

If your customers are based in the UK, standard UK VAT rules apply in the normal way. Once your VAT-taxable turnover exceeds the registration threshold of £90,000 in any rolling 12-month period, you must register for VAT and charge the standard rate — currently 20% — on most digital sales to UK customers, with a small number of exceptions such as certain electronically supplied publications, which can qualify for a zero rate.

Selling to Business Customers Abroad (B2B)

For sales to VAT-registered businesses outside the UK, the general rule is that the place of supply is where the customer is established, not where you are. In practice, this usually means no UK VAT is charged on the sale, and the overseas business customer accounts for VAT themselves in their own country under the “reverse charge” mechanism. This applies to most genuine B2B digital service sales, such as a UK SaaS provider invoicing a VAT-registered company in another country.

Selling to Individual Consumers Abroad (B2C)

This is where digital services diverge most from standard VAT treatment. For sales of digital services to private consumers (not VAT-registered businesses), the place of supply is generally where the consumer is located, not where your business is based. This means, in principle, you may need to charge VAT at the consumer’s local rate and account for it in their country, rather than applying UK VAT.

For consumers in the EU specifically, most UK businesses use the Non-Union One Stop Shop (OSS) scheme to manage this, rather than registering for VAT separately in every EU country where they have customers. Registering once through OSS allows a single quarterly return covering all EU consumer digital sales, with the relevant tax authority distributing the VAT to the correct countries.

Determining Where Your Customer Actually Is

Because the applicable VAT depends on the customer’s location, you need reliable evidence of where each customer belongs. HMRC and equivalent EU guidance generally expect at least two pieces of non-conflicting evidence, which might include the customer’s billing address, the IP address used to access the service, the country code of their payment card or bank details, or their SIM card country code for mobile purchases. This evidence should be retained as part of your VAT records, since HMRC and other tax authorities expect it to support the VAT treatment applied to each sale.

What About Digital Platforms and Marketplaces?

If you sell digital products through a third-party platform or marketplace, the VAT obligation can sometimes shift to the platform operator rather than sitting with you directly, depending on the specific arrangement and who is legally identified as the supplier in the contractual terms, invoices and receipts. This is worth clarifying with any platform you sell through, since it directly affects who’s responsible for charging and accounting for VAT on each sale.

Common Mistakes UK Digital Sellers Make

• Charging UK VAT on B2C sales to EU or international consumers, rather than the correct local rate
• Not registering for the appropriate scheme (such as OSS) once selling meaningfully to EU consumers
• Treating a service with genuine human interaction as automatically exempt from digital service rules, when the level of automation actually matters
• Failing to retain the customer-location evidence needed to support the VAT treatment applied
• Assuming VAT MOSS still applies post-Brexit — it doesn’t for UK businesses, which now generally use the non-Union OSS scheme instead

Digital Services and Making Tax Digital

Separately from the place-of-supply rules, VAT-registered digital businesses are required to keep digital records and file VAT returns through Making Tax Digital-compatible software, the same as any other VAT-registered business. Given that digital sellers are often already using cloud-based tools for their business, this tends to be a relatively straightforward requirement to meet compared to some other sectors.

How This Differs From Selling Physical Goods Online

If your online business sells physical goods rather than (or alongside) digital services, different VAT rules apply, generally based on where the goods are shipped from and to, rather than the digital place-of-supply rules described here. Our guide on the latest tax rules for online sellers covers the broader landscape for e-commerce businesses selling both physical and digital products.

How Felix Accountants Can Help

We help small businesses selling digital products and services work out exactly where VAT applies, get registered for the right schemes (whether that’s standard UK VAT, OSS for EU consumers, or both), and keep the evidence trail HMRC expects. See our small business tax services for how we support online sellers more broadly.

Frequently Asked Questions

Do I need to charge VAT on digital products sold to consumers in the EU?

Generally yes, at the consumer’s local VAT rate rather than the UK rate, since the place of supply for B2C digital services is where the consumer is located. Most UK businesses manage this through the Non-Union OSS scheme.

Do I charge VAT on B2B digital service sales to overseas businesses?

Usually not UK VAT. For B2B sales, the place of supply is generally where the business customer is established, and the reverse charge mechanism typically applies, meaning the customer accounts for VAT in their own country.

What’s the VAT registration threshold for a UK digital business?

The standard UK VAT registration threshold applies — currently £90,000 of VAT-taxable turnover in any rolling 12-month period — the same threshold that applies to any other type of UK business.

Is an online course automatically treated as a digital service for VAT?

Only if it’s largely automated with little or no human intervention. A live, interactive course delivered by an instructor in real time is generally treated differently from a fully automated, pre-recorded course.

Can I still use VAT MOSS as a UK business?

No. VAT MOSS ended for UK businesses after Brexit. UK sellers generally use the Non-Union One Stop Shop (OSS) scheme instead for EU consumer digital sales.