For UK businesses providing digital services (software, downloads, online courses, SaaS) to overseas customers, VAT treatment depends on: (1) where the customer is (UK, EU, rest of world), (2) whether B2B or B2C. B2B to non-UK: generally outside UK VAT scope — the customer self-accounts via the reverse charge mechanism. B2C to EU: UK businesses use the EU One-Stop Shop (OSS) registered in one EU member state, charging local VAT rates. B2C to rest of world: generally outside UK VAT scope. B2C to UK: normal 20% UK VAT applies. The "where" rule for digital services follows the customer location, not yours — proven by 2 pieces of non-contradictory evidence (billing address, IP address, payment card country, etc.).
What counts as "digital services"
HMRC's definition (broad):
- Software downloads and subscriptions.
- SaaS (Software as a Service) — Salesforce-style cloud applications.
- Online courses, e-learning, digital training.
- Video and music streaming, downloads.
- E-books, audiobooks.
- Online dating, virtual worlds, online games.
- Web hosting, cloud storage, computing services.
- Apps and digital content marketplaces.
NOT digital services (different VAT rules apply):
- Live online tutoring with human interaction (often "services" with the where-the-supplier-is rules).
- Online consultancy with significant human input (advice, not pure digital delivery).
- Phone helpdesk support (services, not digital).
- Physical goods sent by post or courier.
The 4-quadrant matrix
| UK customer | Non-UK customer | |
|---|---|---|
| B2B (customer has VAT number) | Charge 20% UK VAT | Outside UK VAT scope. Customer reverse-charges in their country. |
| B2C (consumer or non-VAT customer) | Charge 20% UK VAT | EU customers: OSS-registered, charge local rate. Non-EU: outside UK VAT scope (often). |
B2B to non-UK — the reverse charge
If you sell digital services to a non-UK business that has a VAT number (or local tax registration), the supply is OUTSIDE UK VAT scope. You charge zero VAT.
The customer accounts for VAT in their own country via "reverse charge" — they treat the import as if they'd supplied it to themselves, charging output VAT and reclaiming input VAT simultaneously (net zero for them).
Practical requirements:
- Verify the customer's VAT number (use VIES (EU) or equivalent for non-EU).
- Show the VAT number on your invoice.
- Add the wording "Reverse charge: VAT to be accounted for by the customer."
- Don't charge UK VAT.
B2C to EU — the One-Stop Shop (OSS)
Since 1 July 2021, the EU's OSS scheme allows non-EU businesses to register in ONE EU member state and account for VAT in all 27 member states through a single quarterly return.
Practical workflow:
- Register with the OSS in your chosen EU member state (Ireland is popular for UK businesses).
- Charge the local VAT rate for each customer's country. (e.g. 19% for German customers, 21% for Belgian, 23% for Polish.)
- File quarterly OSS returns showing sales by country.
- Pay all EU VAT to your registered EU state, which distributes it to other member states.
Alternative: register for VAT in each EU country directly. More admin, sometimes lower cost for high-volume sellers.
B2C to non-EU rest of world
Generally outside UK VAT scope. You don't charge UK VAT. The customer's own country VAT rules may or may not apply (Australia GST, US sales tax, etc.) — depends on the destination and any local registration thresholds.
For most UK small businesses with occasional non-EU consumer sales, the practical reality: don't charge UK VAT, don't worry about local sales tax unless you cross specific thresholds.
Worked example — UK SaaS business
£200,000 turnover SaaS, customer mix: 40% UK, 30% EU B2B, 20% EU B2C, 10% rest of world
| UK customers (£80k turnover): charge 20% UK VAT | £16,000 UK VAT collected |
| EU B2B (£60k): outside UK scope, reverse charge applies | £0 UK VAT |
| EU B2C (£40k): OSS registered. Average EU VAT rate ~21% | £8,400 EU VAT (paid to OSS member state) |
| Rest of world (£20k): outside UK scope. Customer local rules may apply. | £0 UK VAT (subject to verification) |
| UK turnover for VAT threshold purposes: £80k + £60k + £40k + £20k = £200k | Above £90k threshold — must register |
| UK VAT bill (quarterly) | £16,000/year |
| EU VAT bill (OSS, quarterly) | £8,400/year |
The business charges 20% to UK customers, 21% (averaged) to EU consumers, and zero to EU businesses and rest-of-world. Three VAT regimes simultaneously — typical complexity for a UK SaaS business with international customers.
The "two pieces of evidence" rule for customer location
For B2C digital services, you must establish the customer's location with 2 pieces of non-contradictory evidence:
- Billing address.
- IP address geolocation.
- Payment card BIN (country of issue).
- Bank account country.
- Mobile country code (for SMS-purchased apps).
If 2 agree: that's the customer location. If they disagree: get a 3rd piece. Document your evidence for HMRC audit.
Sources and methodology
Digital services VAT rules from HMRC Notice 741A. EU OSS from European Commission OSS guidance. Reverse charge mechanism from HMRC Notice 741. For complex digital service VAT planning, see the tax adviser editorial recommendation. The methodology page documents sources.
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