Businesses across the UK need to understand VAT on digital products and services, which is regulated by HM Revenue and Customs (HMRC). For UK businesses selling everything from SaaS (software as a service) subscriptions to downloadable knitting patterns, the tax system has become increasingly digital.
As HMRC continues to support full digitalisation through Making Tax Digital (MTD), understanding how Value Added Tax (VAT) applies to goods and services is a core business requirement.
This blog explains VAT on digital products and services, and what qualifies as a digital service for VAT purposes. It also outlines tax rules for digital products and services in the UK, helping businesses remain HMRC compliant.
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What is VAT in the UK? What Does VAT Stand For?
The Value Added Tax (VAT) is a consumption tax added to the price of goods and services. It is paid by the end consumer but collected by VAT-registered businesses. These businesses collect VAT from customers and remit it to HMRC. Businesses charge VAT on sales (output tax) and pay VAT on business purchases (input tax). Every three months, businesses submit a VAT return comparing how much VAT was collected with VAT paid. Under current VAT rules, HMRC requires the charging of VAT on digital products and services. The VAT rates depend on specific goods and services. The standard rate (20%) applies to most goods and services, while a reduced rate (5%) applies to certain items, and a zero rate (0%) applies to essential items. Zero-rate items are taxable, but the tax is £0. This allows you to reclaim VAT on related costs. However, you do not charge VAT on exempt items and cannot reclaim VAT on related business costs.What Qualifies as a Digital Service?
Before calculating VAT on digital products and services, you must determine whether your goods or services meet HMRC’s definition of digital services. For VAT purposes, digital services are defined as electronically supplied services delivered on the internet with less human intervention. These digital services include:- Radio and television broadcasting services, like live streaming, and the supply of audio and audio-visual content
- Telecommunications services such as online gaming, paging services, and access to the internet
- Electronically supplied services such as e-books, online magazines, music downloads, and software updates.
Services Not Affected by VAT Rules
Services with significant human involvement are excluded from VAT on digital products and services, such as physical goods ordered online, supply of newspapers or journals, booking services or tickets, consultancy services delivered through Zoom, offline repair services of computer equipment, and live one-on-one tutoring.Does VAT Apply to Digital Services?
Yes, VAT applies to digital services, but the specific rules depend on the customer’s location, the nature of the service, and whether a business is selling to businesses or consumers. For UK consumers, businesses must charge the standard 20% VAT if the taxable turnover is more than the £90,000 VAT registration threshold. When selling digital services to EU consumers, UK businesses may need to charge VAT in the customer’s country from the first sale. For B2B sales, the reverse charge mechanism is applied. This means the business customer accounts for the VAT, and you do not charge it on your invoice.Does VAT Apply to Digital Goods?
People usually ask, “Is VAT charged on digital products?” and the answer is yes. VAT applies to digital products based on the nature of the goods and the consumer’s location. The standard rate (20%) applies to most digital goods, including:- Apps, software, and plugins
- Cloud storage and SaaS platforms
- Online games and virtual assets
- Digital templates, design downloads, and graphics
- Audiobooks
- Online newspapers
- E-books
VAT Registration Threshold
To understand VAT on digital products and services, it is important to know about the VAT registration threshold. For UK businesses, the standard VAT registration threshold for the 2026/27 tax year remains at £90,000 of taxable turnover in any rolling 12-month period.The Rolling 12-Month Rule
This is not based on your financial year or calendar year. You must check monthly if your total sales for the previous 12 months exceed £90,000.Oversees Sellers
If you live outside the UK but sell digital services to UK consumers, the threshold is £0. You must register for VAT from your first sale.What are the Place of Supply Rules in the UK
The important rule for VAT on digital products and services is that VAT is usually charged based on the customer's location, not where the business is based.Business-to-Customer (B2C)
When you are selling goods or services to private individuals in the UK, the standard 20% VAT is applied. For customers in the EU, you must charge VAT at the rate applicable in their country. For example, 21% for the Netherlands, and 19% for Germany. Additionally, for customers outside the EU (for example USA), UK VAT is not usually charged. However, you should check the local Sales Tax or Nexus rules for the destination country.Business-to-Business
The Reverse Charge Mechanism usually applies when selling to other VAT-registered businesses. This means you don’t charge VAT on your invoice, and the customer assesses the VAT by themselves on their return in their home country.How to Find Your Customer’s Location?
To determine a customer's location for VAT on digital products and services, you must collect evidence showing where the service is consumed. This is vital to decide which country’s tax rules apply. According to HMRC VAT rules, “types of supplies covered by the presumption rule include those where the digital service is supplied”.- If someone uses an internet cafe or a WiFi hotspot, the VAT will be due where that place is actually located.
- If you sell Wi-Fi on a plane, the VAT will be due at the departure airport.
- The VAT will be due where the physical phone line is installed
- The VAT will be due in the country registered to the SIM card, regardless of where the person is standing when they download the app.
- The VAT will be due where the decoder or viewing card is physically sent.
Is There VAT on Software?
Yes, HMRC applies VAT to software, generally at the standard rate of 20% for both SaaS and downloads. If you are selling software to customers, you must charge 20% VAT if you are registered for VAT. However, if you are a non-UK business selling software to UK customers, you are required to charge 20% VAT on your digital services.Making Tax Digital (MTD) and Digital Reporting
HMRC is focusing on Making Tax Digital for VAT purposes. This means that all VAT-registered businesses are required to comply with MTD. You need MTD-compliant software for VAT on digital products and services. To comply with MTD, you must:- Maintain digital records of every transaction. Spreadsheets are only allowed if they are digitally linked to filing software.
- Use HMRC-approved software to keep your records
- Submit your VAT returns through MTD-compatible software
- Keep records for at least 6 years
Which Services are Exempt from VAT?
Services that do not fit the definition of VAT on digital products and services are entirely exempt from VAT. Many services either fall outside of a digital service due to human involvement or are Zero-Rated (taxed at 0%).Zero-Rated Digital Publication
Services that are taxable at 0% rate are:- Digital newspaper, journals and newsletters
- Digital pictures and books
- Digital music, charts and maps
- E-books and e-booklets
VAT Exempt Services
Some services delivered online are VAT exempt:- Vocational training and online courses
- Online medical consultations
- Digital services provided by banks and non-bank financial institutions
Services Excluded From Digital Definition
According to HMRC, online services that involve significant human intervention are not classified as a digital service. These services include:- Live webinars
- Professional advice
- PDFs manually emailed by staff
Does a CIC Need to Pay VAT?
Yes, a Community Interest Company (CIC) must register for and charge VAT if its taxable turnover exceeds the VAT registration threshold. They pay VAT in the same way as any other commercial limited company. Moreover, HMRC treats CIC as a standard limited company for tax purposes. This means they do not receive automatic VAT exemptions or special reliefs like other charities.Let’s Discuss Your Needs
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Bottom Line
Understanding VAT regulations is essential for managing VAT on digital products and services. Whether it's tracking the fluctuating VAT rates across the EU or determining if your product or service qualifies as electronic, the compliance factor sits with business owners. You are required to utilise MTD-compatible software and consider the VAT on cross-border B2C goods and services. This can help you streamline compliance by eliminating the need for VAT registration in multiple countries, reducing the administration costs for businesses selling in the EU. If you need assistance with VAT for online platform services, consult our experts. At MicroEntityAccounts, we help you ensure legal compliance by managing VAT for your online business effortlessly. You can find additional information about VAT rules and their business implications through the selection of these informative articles:- How to Find a VAT Number for a Company?
- Can You Pay VAT in Instalments? Everything You Need to know
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- Is There VAT on Car Parking? Find All the Details here
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