VAT on digital services has become increasingly nuanced as businesses across every sector go more global than ever.
The rules also changed considerably post-Brexit, and many businesses are still confused about when they need to charge VAT, which services qualify, and how to handle international customers.
Digital services don’t fit neatly into traditional VAT categories, and the rules vary depending on whether you’re selling to businesses or consumers, and where those customers are located.
Here’s what businesses need to know about VAT on digital services in 2025.
What Counts as a Digital Service
The starting point is understanding what HMRC considers a digital service. It’s not as straightforward as “anything delivered online” – there are specific criteria that determine whether VAT applies.
Digital services are electronically supplied services delivered over the internet or electronic network with minimal human intervention. The key word here is “minimal” – if significant human involvement is required, it’s not considered a digital service for VAT purposes.
Services that qualify as digital services:
- Software downloads and SaaS applications
- Streaming services for music, video, or audio content
- E-books, digital magazines, and downloadable documents
- Online games and mobile apps
- Cloud storage and computing services
- Digital advertising space on websites
Services that don’t qualify (despite being delivered online):
- Online consultancy or advisory services delivered by email
- Live webinars or courses taught by instructors
- Legal or financial advice provided electronically
- Booking services for hotels, events, or transport
- Physical goods ordered online but shipped traditionally
The distinction matters because different VAT rules apply to each category. A live coaching session delivered via Zoom isn’t a digital service because it requires human intervention.
However, a pre-recorded course that customers access automatically is a digital service.
UK VAT Registration and Rates for Digital Services
If you’re a UK business selling digital services to UK customers, you need to charge 20% VAT on those sales. But whether you need to register for VAT depends on your turnover and customer base.
Registration Thresholds and Requirements
The standard UK VAT registration threshold is £90,000 of taxable turnover in any rolling 12-month period. This increased from £85,000 in April 2024 and is currently the highest VAT threshold in the OECD.
However, there’s a crucial exception for overseas businesses. If you’re based outside the UK but selling digital services to UK consumers, there’s no registration threshold – you must register for UK VAT from your first sale to a UK consumer.
This creates an unusual situation where a US software company selling to UK consumers must register for UK VAT immediately, while a UK company can wait until they reach £90,000 in turnover.
Business vs Consumer Sales
The rules differ dramatically depending on whether you’re selling to businesses (B2B) or consumers (B2C):
- B2B sales: If your customer provides a valid VAT registration number, they’re responsible for accounting for VAT under the reverse charge mechanism. You don’t charge VAT, but you must verify their VAT number and keep proper records.
- B2C sales: You must charge VAT at the rate applicable where the customer is located. For UK consumers, that’s 20%. For EU consumers, it varies by country.
- Mixed customers: If a customer claims to be a business but cannot provide a VAT number (perhaps because they’re below their country’s registration threshold), you can accept other evidence, such as business websites or commercial documents. But it’s your decision whether to accept this evidence.
Selling to International Customers
This is where it gets complicated. After Brexit, the UK and EU have separate VAT systems, and the rules for digital services to international customers have changed significantly.
Selling to EU Customers
If you’re a UK business selling digital services to EU consumers, you’re generally not liable for UK VAT on those sales. Instead, you may need to register for VAT in each EU country where you have customers.
However, there are two ways to handle EU VAT obligations:
- Individual country registration: Register for VAT in each EU member state where you sell digital services. This is complex and time-consuming, especially for businesses selling across multiple countries.
- EU OSS (One-Stop Shop) scheme: Register for the OSS scheme in one EU country to declare and pay all your EU VAT in one place. This is simpler for businesses selling across multiple EU countries.
Determining Customer Location
For international sales, you need to determine your customer’s location to apply the correct VAT treatment. This isn’t always straightforward, especially for digital services.
Evidence you need to collect:
- Two pieces of information confirming customer location
- Billing address and IP address location
- Bank details or payment method location
- Product coding information linking sales to specific jurisdictions
Special rules apply for certain circumstances (mostly apply to large enterprises):
- Mobile phone services: VAT is due based on the country code of the SIM card
- Services accessed through public WiFi: VAT applies where the access point is located
- Satellite TV services: VAT is due where the decoder or viewing card is sent
Marketplace and Platform Sales (Etsy, etc)
Many digital platforms collect and remit VAT on behalf of sellers, greatly simplifying the process. Instead of you having to register for VAT in dozens of countries, track different tax rates, and file multiple returns, the platform handles everything.
This happens because tax authorities treat the platform as the actual supplier when they control key parts of the transaction. The platform becomes responsible for VAT compliance, not you.
How Etsy Handles Global VAT Collection
Etsy provides a good example of how platform VAT collection works in practice. When you sell digital downloads through Etsy’s automatic system, they take responsibility for VAT in specific countries.
Here’s what actually happens when someone buys your digital product:
- A customer in Germany finds your £10 digital download
- At checkout, Etsy automatically calculates German VAT at 19% and adds €2.28 to the price
- The customer pays €14.28 total
- Etsy processes this payment, deducts their fees, and pays you your share
- Separately, they send the €2.28 VAT to German tax authorities
The same process happens for customers in specific countries where Etsy handles VAT collection. Etsy currently collects VAT for buyers in:
- Australia, Belarus, Chile
- The entire EU (all 27 member countries)
- Georgia, Iceland, India, Indonesia
- Kenya, Malaysia, Mexico, Moldova
- New Zealand, Norway, Russia
- Saudi Arabia, Serbia, Singapore, South Africa, South Korea
- Switzerland, Taiwan, Thailand, Turkey
- Ukraine, United Arab Emirates, Vietnam
For customers in countries not listed, such as the United States, buyers pay the listed price with no VAT added. You generally have no VAT obligations for these sales since these countries either don’t have VAT systems or don’t require foreign businesses to register.
From your perspective as the seller, you simply:
- List your product at your desired price
- Receive payments after Etsy’s fees
- Have no VAT compliance responsibilities for covered countries
- Don’t need to track international VAT rates or rule changes
This system works because Etsy controls the checkout process, sets the final price customers pay, processes all payments, and manages delivery through their download system. Tax authorities in these countries recognize Etsy as the supplier, making them responsible for VAT compliance.
Be aware that you need to use Etsy’s automatic digital download system for this to work as stated.
Other Platforms That Handle VAT
Many major platforms offer similar VAT handling for digital products:
- Amazon KDP: Handles VAT for e-book sales globally across their international marketplaces
- Apple App Store: Manages VAT for app sales, in-app purchases, and subscriptions worldwide
- Google Play: Handles VAT compliance for all Android app transactions
- Some smaller platforms: May offer VAT handling, though coverage varies significantly
Ultimately, the rules are complex, and you should seek advice for your specific scenario.
What You Still Need to Consider
Even when platforms handle customer VAT, you may still have some obligations:
- Home country reporting: If you’re VAT-registered, you might need to report platform-collected VAT on your returns
- Platform fees: VAT on advertising fees or transaction charges may be separate from product VAT
- Product type restrictions: Some platforms only handle VAT for certain delivery methods or product categories
- Policy changes: Platform VAT policies can change with little notice, shifting responsibility back to sellers
The key is never to assume! Always check their current VAT policy for your specific products and stay informed about changes that could move responsibility back to you.
Zero-Rated Digital Publications
While most digital services are subject to 20% VAT, there are important exceptions for certain publications. Some electronically supplied publications qualify for zero-rate VAT, including:
- Electronic versions of books, newspapers, and periodicals
- Audiobooks (electronic versions of books that can be read)
- Digital publications where less than half the content is advertising or multimedia
However, publications that contain more than half advertising, audio, or video content don’t qualify for the zero rate.
Common VAT Mistakes to Avoid
As you can see, it’s pretty complex stuff! Even experienced businesses can trip up when it comes to VAT on digital services. Here are the most frequent errors we see businesses make, and how to avoid them:
- Assuming all online services are digital services: Human-delivered services like consultancy don’t qualify, even if delivered electronically.
- Treating all customers the same: B2B and B2C sales have different rules, and international sales add another layer of complexity.
- Ignoring small overseas sales: There’s no minimum threshold for overseas businesses selling to UK consumers – even small sales can trigger registration requirements.
- Not collecting proper evidence: You need two pieces of evidence to prove customer location for international sales.
- Mixing up zero-rated and exempt supplies: Zero-rated supplies are still subject to VAT (at 0%), while exempt supplies are entirely outside the VAT system.
Getting VAT Right for Your Digital Business
International VAT and VAT on digital services are notoriously complex, as you may be able to see for yourself!
As the digital economy expands and VAT rules grow increasingly complex across multiple jurisdictions, what worked for simple domestic sales won’t necessarily scale as your business grows internationally.
At Double Point, we help digital businesses navigate VAT compliance across all their markets.
From determining which services qualify as digital supplies to setting up compliant billing systems and handling international registration requirements, we ensure your VAT obligations don’t become obstacles to growth.
Book a consultation with us today to discuss how we can help streamline your digital services VAT compliance.
