The digital economy has evolved a great deal in recent years, and it’s now possible to supply digital services seamlessly across borders. This can complicate the VAT rules, so in this article we’ll cover what contractors and small business owners need to know about VAT on digital services.
What are digital services?
Digital services are defined as being those which are delivered over the internet with little or no human intervention, and a high degree of automation. So, to qualify as digital, the sale must be either:
Entirely automatic – for example an automatic download of content after the consumer clicks “buy now”.
Including a small amount of manual intervention that doesn’t change the nature of the supply.
Using the internet to facilitate delivery doesn’t always mean your business is supplying a digital service. For example, if you’re providing advice over email or delivering training over the internet, this doesn’t count as a digital service.
Where there is no human involved in delivery, for example where you’re supplying recorded video, written content or software, this will usually count as a digital service. This could 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.
UK VAT on digital services
If your business is based in the UK and you supply digital services to UK customers, those services are liable to VAT in the UK.
You only need to account for UK VAT if you’re a VAT registered business. This could mean your annual turnover is over the £85,000 threshold, or that you’ve registered voluntarily.
The standard VAT rate of 20% usually applies to the sale of digital services, however some publications are eligible for a zero rate of VAT. This applies to:
Books
Journals and periodicals (including magazines)
Booklets
Children’s picture books
Brochures
Newspapers
Leaflets
Pamphlets
It doesn’t apply to:
Where more than half of the publication is devoted to advertising, audio or video content
Audiobooks
Supplies of intellectual property
Architectural and engineering drawings or plans – even if supplied electronically
Supplying via a digital platform or marketplace
If you supply digital services through a platform or marketplace, you need to determine if you’re supplying the platform or the end user. If the platform operator sets the general terms and conditions, authorises payment or is responsible for the delivery or download of the service, they are classed as supplying the end user and they are responsible for accounting the for VAT instead of you.
The Place of supply
Digital services are deemed to be supplies where the customer is located, so if you supply digital services to customers outside the UK, they are not liable to UK VAT and they may instead be liable to VAT in the country where the customer is based.
Supplying EU customers
The EU currently has no threshold for VAT registration, unlike the UK where the threshold is £85,000. This means sales to EU consumers are liable to VAT from the first supply, regardless of value. This is currently set to change in January 2025.
The EU VAT treatment depends on whether the transaction counts as a business to business (B2B) sale, or business to consumer (B2C).
B2B sales
If you’re supplying an EU business customer, they are liable to pay VAT via reverse-charge, meaning they declare both the input and output VAT at their end. In this case you will have no EU VAT obligations.
If your customer provides a VAT number, or alternative proof that they’re a registered business, you can treat them as a business customer. Otherwise, you must treat the sale as a B2C transaction.
B2C sales
If you’re supplying digital services to a private EU consumer, you must charge, collect and remit EU VAT to the tax authority of the country where the consumer resides. So, if you’re supplying a customer in Spain, you must charge and collect VAT at the relevant rate in Spain, and remit this to the Spanish tax authorities.
If you need to account for EU VAT you can do this either by registering for VAT in each EU member state that you supply in, or you can register for the OSS One-Stop-Shop scheme in the EU country of your choice.
Determining your customer’s location
Because your customer’s country of residence determines the VAT treatment, you must collect and keep evidence to prove which country each customer lives in. Tax offices will accept:
The customer’s billing address
The customer’s bank details
Their SIM card country code
The IP address of their device
Their landline telephone location (if the service was supplies through the fixed landline)
Other commercially relevant info – for example a product code which links the sale to a location.
The Presumption rule
In order to simplify the rules for some digital services, HMRC has determined that you can make a presumption about the place where a supply us to be taxed in some circumstances. This rule applies where the service is supplied:
At a hotel lobby or restaurant through a wi-fi hotspot or through a telephone box or kiosk. In these cases, VAT is due at the actual location of the hotspot or kiosk.
Onboard transport travelling between countries. In this case VAT is due in the country of departure.
Through a landline phone – VAT is due where the landline is located.
Through a mobile phone – VAT is due according to the country code on the SIM card.
If you have questions or if we can help in any way, please call our expert team on 01296 468483 or email info@orangegenie.com.