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VAT on digital services

Value Added Tax (VAT) is a constant issue that many online and e-commerce businesses need to be aware of. There are different rules relating to VAT depending on whether the supply of digital services is to another business (a B2B transaction) or a private consumer (a B2C transaction). Read this guide for more information.
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VAT is a consumption tax levied on most goods and services provided by registered businesses in the UK. VAT is considered an indirect tax because the tax is paid to the government by the seller (the business) rather than the person who ultimately bears the economic burden of the tax (the consumer).

For further information, read VAT.

A digital e-commerce business model supplies digital products wholly online without needing a direct physical presence in the markets in which the business operates. The following are examples of digital e-commerce services:

  • provision of digitised products including ebooks, software, software upgrades and digital applications (ie apps)
  • services provided on an electronic website or a webpage
  • provision of databases (such as search engines, text, information and automated distance learning services)
  • services automatically generated and supplied by a computer via the internet or an electronic network
  • downloads of music, films, games and gambling games via the internet

Therefore businesses who sell apps such as smartphone games, ebooks, online gaming businesses, streaming services and digital access to products that are subscribed to, are considered digital services for VAT purposes.

As a consumption/sales tax, VAT can apply to all forms of transactions in digital e-commerce. The main focus points are:

  • considering whether the services are provided to a business (B2B) or a final consumer (B2C) as this will determine who is responsible for accounting for VAT on the services
  • where the services were supplied
  • where they were 'effectively enjoyed'

B2B digital e-commerce between EU businesses

If the customer is a business and is located in the EU, it is the customer who has the liability to account for VAT. To determine the location of the business, it's usually where the business is registered and has its head office, or the country where it has fixed premises and staff receiving the services.

If the customer provides their VAT number, they are treated as a business customer. If the customer does not provide a VAT number, the supplier must receive alternative evidence to prove that they are a registered business in order to be treated as a business customer.

B2C digital e-commerce within the EU

VAT is due in the consumer's location (where they have a permanent address of usual residence). So VAT applies to where the customer uses or consumes the digital services.

The rate of taxation depends on the location of the consumer, not the location of the supplier. On a B2C basis, the supplier is responsible for accounting for VAT on the supply to the tax authority and at the rate applicable in the consumer's EU member state.

For example if your customer resides:

  • in the UK, then UK VAT is due
  • in another EU member state, then VAT will be due in that country according to its rate and rules and you'll be required to either register in that member state or register for the MOSS (special accounting schemes for business services)

B2B/B2C digital e-commerce outside of the EU

If an EU business is supplying digital services to a business or consumer outside of the EU then no EU VAT is charged. However if the service is effectively used and enjoyed in an EU country, that country can decide to levy VAT.

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