Suppose three customers sign up for your software subscription in the same week: a design agency in Berlin, a freelancer in Dublin and a company in Austin, Texas. Together they pay about £180 a month, and your UK sales are well below the £90,000 VAT registration threshold.

Two of the three sales have VAT consequences, and the sale to the Dublin freelancer means you must register for EU VAT from that first sale. The £90,000 threshold does not apply to any of the three, because it counts only supplies made in the UK, and none of these customers is in the UK.

Where the supply is made

UK VAT applies to supplies made in the UK. If the place of supply is another country, no UK VAT is due, but that country's VAT may be. The first step for each sale is to work out where it is made.

For services there are two rules and one important exception:

  • Business to business (B2B). The place of supply is where the customer belongs. Sell to a company in Germany and the supply is made in Germany.
  • Business to consumer (B2C). The place of supply is normally where the supplier belongs, so a UK business selling to a private individual abroad would normally charge UK VAT.
  • Digital services sold to consumers. For digital services, the place of supply is where the consumer belongs. This rule makes a UK startup selling software to a consumer in Germany liable for German VAT.
One software product sold to three customers, and the VAT treatment of each sale VAT treatment of one software product sold to three customers Where each sale is made decides which VAT rules apply. Agency in Berlin (B2B) Place of supply Germany UK VAT charged None Who accounts for it The customer Reverse charge. You must hold and check their VAT number. Registration needed: no Freelancer in Dublin (B2C) Place of supply Ireland VAT rate due 23% Threshold £0 Due from the very first sale. Register once for the whole EU. Registration needed: yes Company in Austin, Texas Place of supply USA VAT due None Tax to check Sales tax Each US state decides whether software sales are taxable. Registration needed: maybe None of these sales counts towards the £90,000 UK VAT registration threshold. Rates shown are the 2026 standard rates in each country. The worked example below uses illustrative figures.

What counts as a digital service

The EU definition applies to these sales. An electronically supplied service is one delivered over the internet, essentially automated, with minimal human intervention, and impossible to provide without the technology.

A self-serve software subscription is a digital service, and so are an automated download of a template pack, a stock photo library, an app, and a pre-recorded course that a customer buys and watches on their own. A live one-to-one strategy call over video is a normal consultancy service and follows the general rule, and so does a course taught live by a person over video. Two products that look alike on a pricing page can be treated differently, depending on whether a person does anything after the customer pays.

Business customers: the reverse charge and VAT numbers

Sell to a VAT-registered business anywhere outside the UK and the supply is made in their country, outside the scope of UK VAT. They account for the VAT themselves under the reverse charge. You charge no VAT and, if you are UK VAT registered, the sale still goes in box 6 of your return with no output tax against it.

The condition is that you can show the customer is in business. In practice that means collecting their EU VAT number at checkout, checking it with VIES, the EU's online VAT number checking service, at the point of sale, and keeping the result. A customer who cannot give you a valid number is treated as a consumer, and the consumer rules below apply. A VAT number typed into the checkout and never checked does not show that the customer is a business.

EU consumers: VAT is due from the first sale

There is a €10,000 annual threshold for cross-border sales to consumers within the EU, below which a seller can keep charging its own country's VAT. That threshold applies only to businesses established in the EU, so it does not apply to a UK business. A UK business is a supplier from outside the EU and owes VAT in the consumer's own country from the first sale, at that country's rate.

You then have two ways to deal with it: register for VAT in every member state where you have a consumer, or register once for the non-Union One Stop Shop and file a single quarterly return covering all twenty-seven.

Worked example: £4,800 of EU consumer revenue

The figures below are illustrative. A UK software subscription startup in 2026/27 has £42,000 of annual recurring revenue at a flat £20 a month per seat, with no VAT line anywhere on the checkout. It splits as follows.

Where the £42,000 comes from
UK customers: £26,000
EU business customers, all with valid VAT numbers: £9,000
EU consumers and non-business customers: £4,800 (Germany £2,400, Ireland £1,500, France £900)
US customers: £2,200

The UK position. Taxable turnover is the value of supplies made in the UK. The EU and US sales are outside the scope of UK VAT, so they do not count. UK taxable turnover is £26,000, which is £64,000 below the registration threshold, so no UK registration is required.

The EU position. The £4,800 of consumer revenue was collected at a flat price with VAT never mentioned, so the VAT due has to come out of the amounts already received. At the 2026 standard rates:

  • Germany, 19%: £2,400 × 19/119 = £383.19
  • Ireland, 23%: £1,500 × 23/123 = £280.49
  • France, 20%: £900 × 20/120 = £150.00

That is £813.68 owed out of £4,800 of revenue, or 17%, and it comes out of the business's margin because the customers were not charged it. Interest and penalties in each member state for past periods may be added to that.

The same year with VAT added at checkout. Show £20 plus local VAT and the German customer pays £23.80, the Irish customer £24.60 and the French customer £24.00. If the same customers buy, you keep the full £4,800 and pay over the VAT you collected, so the £813.68 stays in the business. The checkout settings decide which of the two positions you are in.

Registering for the non-Union One Stop Shop

You choose one member state, register there as a supplier from outside the EU, and get a single One Stop Shop (OSS) registration covering sales to consumers across the EU. You file one return each quarter, in euros, by the last day of the month following the quarter: 30 April, 31 July, 31 October and 31 January. The member state you file with passes the VAT on to the other member states.

You still have to charge each customer their own country's rate at the point of sale, so your billing system needs an up-to-date table of rates. UK businesses often register in Ireland, where the online service and correspondence are in English.

Evidence of where your customer is

For digital services sold to consumers you must determine the customer's location from two items of non-contradictory evidence. The accepted items are the billing address, the IP address, the country of the bank or card issuer, the country code of a SIM card, and the location of a fixed landline. If two items agree, they settle where the customer is. If they disagree, find a third.

Stripe, Paddle and other billing platforms can capture most of this automatically once the setting is switched on. Store the evidence with each transaction. Records of sales made under the One Stop Shop must be kept for ten years.

Using a merchant of record

A merchant of record, such as Paddle, Lemon Squeezy or FastSpring, buys your product and sells it on to the customer. The customer's contract is with the merchant of record, so the VAT registrations, rate tables, evidence and returns are its responsibility, and you invoice the merchant of record.

A merchant of record charges a higher percentage of revenue than a payment processor, and the extra pays for the VAT work. On £4,800 of EU consumer revenue a merchant of record usually costs less, because an OSS registration and four returns a year cost more in fees and time than the extra percentage. At a few hundred thousand pounds of consumer revenue the comparison usually reverses. Work out where the two costs cross for your business before choosing.

Outside the EU

The United States has no VAT. Its states charge sales tax, and two questions decide whether you owe any: whether you have enough connection with the state for it to tax you (known as nexus), and whether that state taxes software subscriptions. The answers differ from state to state. US sales of £2,200 a year are normally left alone, while US sales of £220,000 need their own advice.

What to do this week

  1. Export every non-UK sale from the last twelve months and split it three ways: EU business with a validated VAT number, EU consumer, rest of world.
  2. If there is any EU consumer revenue, the VAT liability started with the first sale. Find that date, because it sets the period you have to correct.
  3. Check that your checkout validates VAT numbers with VIES and keeps the result, and that it saves two pieces of location evidence for each transaction.
  4. Recalculate your UK taxable turnover without the sales that are outside the scope of UK VAT, and compare it with the £90,000 threshold.
  5. Decide whether registering for UK VAT voluntarily would save money. Sales that would be taxable if made in the UK still let you reclaim the VAT on your costs, so a startup with large cloud, software and agency bills can be better off registered.
  6. Choose how to handle EU consumer sales, through OSS registration or a merchant of record, before the next renewal date, so that prices change only once.
  7. Put the four OSS return deadlines in the calendar as soon as the registration is granted.

Our VAT for startups guide covers the UK registration decision and the scheme choice, and our VAT services page sets out what we handle. If you have not yet decided whether to set up a limited company, see our sole trader versus limited company comparison.

Where we help

We work out the place of supply for each type of sale, set up the checkout to collect and check VAT numbers and location evidence, deal with UK VAT registration and returns, and set up OSS registration or a merchant of record, whichever costs less for your sales. Where sales have already been made without VAT, we work out how much is owed before any tax authority is contacted. Your monthly accounting fee comes from the instant quote. Get started.