How to manage VAT on digital services

Correctly handling VAT for international digital sales ensures you remain compliant with global tax laws while expanding your product reach beyond the UK.

The Bottom Line

If you sell digital services (like SaaS, apps, or e-books) to consumers (B2C) in the EU, you are legally required to charge VAT at the rate applicable in the customer’s country, not the UK. Since the UK left the EU, you can no longer use HMRC’s MOSS system for EU sales; instead, you must register for the EU VAT One Stop Shop (OSS) in an EU member state or use a Merchant of Record to handle the tax on your behalf.

What are 'Digital Services'?

For VAT purposes, digital services are those that are delivered over the internet with minimal human intervention. This includes:

Software-as-a-Service (SaaS) and cloud-based subscriptions.
Downloadable software, apps, or plugins.
Digital content like e-books, streaming music, or online courses that are pre-recorded.

If your service involves significant human interaction (like 1-on-1 live coaching via Zoom), it might not be classified as a 'digital service,' and different VAT rules may apply.

Understanding the 'Place of Supply'

In the world of VAT, the 'place of supply' is where the tax is due. For B2C digital services, the place of supply is the customer's location. If you sell a subscription to a customer in France, you must charge French VAT (currently 20%). If you sell to a customer in Hungary, you must charge Hungarian VAT (currently 27%).

To comply, your billing system must be able to:

Identify the customer's location: You usually need two pieces of non-conflicting evidence, such as their billing address and their IP address.
Apply the correct tax rate: Rates vary across the EU, ranging from 17% to 27%.
Store this data: You are required to keep these records for 10 years.

Navigating the EU VAT OSS

Since the UK is no longer an EU member, you cannot report EU sales through HMRC. To simplify things without registering for VAT in every single EU country, you can use the Non-Union VAT One Stop Shop (OSS).

How it works: You choose one EU country (Ireland is a popular choice for UK founders due to the language) and register for the Non-Union OSS there.
Reporting: Every quarter, you submit a single electronic return and one payment covering all your B2C digital sales across the entire EU. That country then distributes the tax to the relevant member states.

The SaaS Shortcut: Using a Merchant of Record

For many small businesses and side-hustlers, the administrative burden of OSS is too high. This is why many UK SaaS founders use a Merchant of Record (MoR) like Paddle or Lemon Squeezy.

An MoR acts as a middleman. Technically, you sell your service to the MoR, and they sell it to the end customer. Because the MoR is the seller of record, they are responsible for calculating, collecting, and remitting the correct VAT globally. This removes the need for you to register for the EU OSS entirely.

Best Practices for Your Billing System

If you decide to manage VAT yourself rather than using an MoR, ensure your checkout process is robust:

Feature	Why it's needed
VAT Number Validation	If a customer provides a valid EU VAT number, it is a B2B sale. You don't charge VAT (the customer accounts for it themselves), but you must verify the number is active via the VIES system.
Location Evidence	Capturing the IP address and billing country at the point of sale to prove where the customer is based.
Compliant Invoicing	Your invoices must show the customer's address, the VAT rate applied, and your own VAT/OSS registration details.

Managing VAT can feel overwhelming, but getting it right from day one prevents a massive administrative headache (and potential fines) as your business grows. Whether you choose the DIY route via OSS or the automated route via an MoR, ensure your systems are ready before you take your first international payment.

Created by hatch. • Updated on April 29, 2026