Your first Berlin customer created a VAT registration. Your first Austin customer did not.

Three self-serve subscriptions land in the same week. A design agency in Berlin. A freelancer in Dublin. A company in Austin, Texas. Between them they are worth about £180 a month, and nobody at your company gives VAT a second thought, because you are a long way under the £90,000 registration threshold and everyone knows what that threshold means.

Two of those three sales carry a VAT consequence. One of them created a registration obligation on the day the card cleared. And the £90,000 threshold is irrelevant to all three, because it is a threshold for supplies made in the UK, and only one of those customers is in the UK.

The only question that matters is where the supply is made

UK VAT applies to supplies made in the UK. If the place of supply is somewhere else, UK VAT never enters the conversation — but that country's VAT might. Everything below follows from working out where each sale lands.

For services there are two rules and one important exception:

• Business to business. 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. The place of supply is normally where the supplier belongs — so a UK business selling to a private individual abroad would ordinarily charge UK VAT.
• The exception that catches every SaaS company. For digital services sold business to consumer, the place of supply is where the consumer belongs. That single carve-out is what puts a two-person startup in Bermondsey on the hook for German VAT.

What actually counts as a digital service

The EU definition is the one that matters, and it is narrower than founders assume. An electronically supplied service is one delivered over the internet, essentially automated, with minimal human intervention, and impossible to provide without the technology.

So a self-serve SaaS subscription is a digital service. So is an automated download of a template pack, a stock photo library, an app, or a pre-recorded course that a customer buys and watches on their own. A live one-to-one strategy call over video is not — that is a normal consultancy service following the general rule. A course taught live by a human over video is not either. Two products that look identical on a pricing page can sit on opposite sides of this line, and the difference is whether a person does anything after the payment goes through.

Business customers: the reverse charge, and the number you have to collect

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 nothing 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 genuinely in business. In practice that means capturing their EU VAT number at checkout, validating it against the EU's VIES database at the point of sale, and keeping the result of that check. A customer who cannot give you a valid number is treated as a consumer, and the whole B2C machinery below applies to them instead. A checkout that collects a VAT number as free text and never validates it is not evidence of anything.

EU consumers: there is no threshold, and this is the part that surprises people

There is a well-known €10,000 annual threshold for cross-border B2C sales within the EU, below which a seller can keep charging its own country's VAT. It does not apply to you. That threshold exists for businesses established in the EU. A UK business is a non-EU supplier, and VAT is due 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 SaaS 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.

The UK position. Taxable turnover is the value of supplies made in the UK. The EU and US sales are outside the scope, so they do not count. UK taxable turnover is £26,000 — £64,000 below the registration threshold. No UK registration is required, and the founder's instinct that "we are nowhere near the threshold" was correct as far as it went.

The EU position. The £4,800 of consumer revenue was collected at a flat price with VAT never mentioned, so the VAT is inside the money already taken, not on top of it. 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 a revenue line of £4,800 — 17% of it — and every penny comes out of margin, because the customers were never asked for it. Add interest and the penalty position in each member state for the periods already gone, and the number grows from there.

The same year, priced properly. Show £20 plus local VAT at checkout and the German customer pays £23.80, the Irish customer £24.60, the French customer £24.00. You keep the full £4,800 and remit VAT you actually collected. The product is identical, the customers still buy, and the £813.68 stays in the business. The entire difference is which side of the price line the VAT sits on, and it is decided at checkout, not at year end.

Registering for the non-Union One Stop Shop

You choose one member state, register there as a non-EU supplier, and get a single OSS registration covering consumer sales into the whole EU. One return, quarterly, in euros, due 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 distributes the money to the others.

What OSS does not do is choose the rate for you. You still have to charge each customer their own country's rate at the point of sale, which means your billing system needs a rate table it keeps current. Most UK startups register through Ireland for the obvious reason that the portal and the correspondence are in English.

Proving where your customer is

For B2C digital services 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. Two that agree is a determination; two that disagree means you go and find a third.

Stripe, Paddle and the other serious billing platforms capture most of this automatically, but only if the option is switched on. Store the evidence with the transaction, not just the invoice, and keep it — digital services records are expected to be retained for ten years.

The shortcut worth pricing: a merchant of record

Paddle, Lemon Squeezy and FastSpring do not process your payments, they buy your product and sell it on. Legally the customer's contract is with them, so the VAT registrations, the rate tables, the evidence and the filings are all theirs. You raise one invoice, to them.

They charge a meaningfully higher percentage of revenue than a payment processor does, and that gap is the price of the compliance. On £4,800 of EU consumer revenue the arithmetic usually favours the merchant of record, because a single OSS registration plus quarterly filings costs more in fees and attention than the fee difference on that volume. Somewhere north of a few hundred thousand of consumer revenue it flips. Work out where your own crossover sits before you commit to either.

Outside the EU

The United States has no VAT. It has state sales tax, and two separate questions decide whether you owe any: whether you have nexus in that state, and whether that state treats SaaS as taxable at all. Both are answered state by state, and the answers differ, which is why a US revenue line of £2,200 is normally left alone and a US revenue line of £220,000 gets its 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 liability started with the first one. Find that date, because it sets the period you have to correct.
3. Check that your checkout validates VAT numbers against VIES rather than just storing what was typed, and that it saves two pieces of location evidence per transaction.
4. Recalculate your UK taxable turnover with outside-scope sales stripped out. Many startups find they are far further from £90,000 than their revenue figure suggested.
5. Then decide whether voluntary UK registration pays anyway. Sales that would be taxable if made in the UK still carry the right to recover input VAT, so a startup with heavy cloud, tooling and agency costs is often better off registered.
6. Choose your route for the EU: OSS registration or merchant of record. Do it before the next renewal cycle, so prices change once rather than twice.
7. Put the four OSS quarter-end dates in the calendar the day 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 are still working out whether to incorporate at all, the sole trader versus limited company comparison is the place to start.

Where we help

We work out the place of supply for each revenue line, get the checkout collecting and validating the right things, handle the UK registration and returns, and set up OSS or a merchant of record depending on which is cheaper at your volume. Where sales have already gone out without VAT, we quantify the exposure before anyone contacts a tax authority. Banded fixed fees from £49 + VAT a month. Get started.