VAT when selling online to customers abroad

The fundamental distinction: B2B vs B2C sales

VAT rules differ significantly depending on whether you're selling to another business (B2B) or to a private consumer (B2C).

B2B sales: If your customer is a VAT-registered business acting in their business capacity, different place of supply rules apply. You'll need evidence of their business status, typically their VAT registration number.

B2C sales: When selling to private consumers or businesses receiving goods or services for personal use, consumer-focused rules apply. These are generally more complex for cross-border transactions.

Selling goods to overseas customers

When you sell physical goods to customers outside the UK, VAT treatment depends on where the goods go and who receives them.

Exports to customers outside the EU

Goods exported directly from the UK to destinations outside the EU (including the USA, Australia, or any non-EU country) can be zero-rated for VAT. This means you charge 0% VAT, but you must keep evidence that the goods left the UK.

Selling goods to EU consumers (distance selling)

Since Brexit, selling goods to consumers in the EU has become more complex. The EU's Import One Stop Shop (IOSS) scheme can simplify VAT compliance for consignments valued at 150 euros or less.

Without IOSS: Your customer pays import VAT and potentially customs duty when the goods arrive in their country. This creates a poor customer experience as they face unexpected charges.

With IOSS: You register for the IOSS scheme in an EU member state, charge VAT at the customer's country rate at checkout, and report all EU sales through a single quarterly return. The customer receives goods without additional charges at the border.

IOSS eligibility and registration

• Value limit: Consignments must not exceed 150 euros (excluding VAT)
• Excise goods excluded: Alcohol and tobacco cannot use IOSS
• Registration: UK businesses must register through an EU member state (you'll need a fiscal representative unless you have an EU establishment)
• Monthly returns: Submit returns and pay VAT by the end of the month following each reporting period

Selling services to overseas customers

For services, the 'place of supply' determines which country's VAT rules apply. The rules differ significantly between B2B and B2C transactions.

B2B services (general rule)

When you supply services to a business customer outside the UK, the place of supply is generally where the customer belongs. This means:

• Your supply is outside the scope of UK VAT
• You do not charge UK VAT
• The customer may need to account for VAT in their own country (reverse charge)

You must verify your customer's business status. Get their VAT registration number and business address. Keep this evidence with your records.

B2C services (general rule)

For most services to non-business customers, the place of supply is where you (the supplier) belong. This means UK VAT applies to your supply, and you charge VAT at the standard UK rate.

Exception: Digital services, telecommunications, and broadcasting have special rules covered below.

Digital services: special rules

If you sell digital services (software, downloads, streaming, SaaS, e-books, online courses without live interaction, games), special place of supply rules apply for B2C sales.

Selling digital services to EU consumers

The place of supply is where the consumer is located, not where you are. This means you must charge VAT at the rate of the customer's EU country.

Compliance options:

1. One Stop Shop (OSS) scheme: Register in one EU member state and file a single quarterly return covering all EU consumer sales. You charge VAT at each customer's local rate but report and pay through one portal.
2. Register in each country: Without OSS, you must register for VAT separately in every EU country where you have customers. This is administratively burdensome for most businesses.

Selling digital services to consumers outside the EU

When your customer is outside the EU (USA, Australia, etc.), your supply is outside the scope of UK VAT. You do not charge UK VAT. The customer may owe local sales tax or VAT in their own country, but this is their responsibility.

Evidence of customer location

You must collect and keep two pieces of non-contradictory evidence showing where your customer is located:

• Billing address
• IP address (geolocation)
• Bank details (country of the bank)
• Country code of SIM card (for mobile services)

Keep this evidence for 10 years - longer than the standard 6-year VAT record retention period.

The One Stop Shop (OSS) scheme for UK businesses

The OSS scheme simplifies VAT compliance when selling to EU consumers. It's available for:

• Digital services to EU consumers
• Telecommunications and broadcasting services to EU consumers
• Distance sales of goods from Northern Ireland to EU consumers (if you have stock there)

How OSS works

1. Register for OSS in one EU member state (you'll need a fiscal representative as a non-EU business)
2. Charge VAT at the rate of each customer's country
3. File quarterly OSS returns listing sales by country
4. Pay all EU VAT through one portal

Important: UK businesses cannot use the UK to register for OSS. You must register through an EU member state.

When the reverse charge applies

The reverse charge shifts responsibility for accounting for VAT from the supplier to the customer. This is relevant in two scenarios for e-commerce businesses:

You're the supplier (B2B services to overseas businesses)

When you supply services to a VAT-registered business customer where the place of supply is their country, you don't charge VAT. Your customer accounts for VAT in their own country under the reverse charge. Your invoice should state 'Reverse charge: customer to account for VAT'.

You're the customer (receiving services from overseas)

If you receive services from an overseas supplier where the place of supply is the UK, you must account for VAT yourself under the reverse charge. Include the VAT in Box 1 of your VAT return (output tax) and reclaim it in Box 4 (input tax) if you're entitled to full recovery.

Marketplace and platform sales

If you sell through online marketplaces (Amazon, eBay, Etsy, etc.), the platform may be responsible for charging and accounting for VAT on some of your sales.

When the marketplace handles VAT

Online marketplaces are deemed the supplier for VAT purposes when:

• Goods are imported into the UK with a value of £135 or less
• Goods are already in the UK and sold by an overseas seller through the platform
• Digital services are supplied through the platform to consumers

In these cases, the marketplace charges VAT to the customer and accounts for it to HMRC. You (the underlying seller) treat your supply to the marketplace as zero-rated.

When you're still responsible

If you're a UK seller using a marketplace to reach overseas customers, you remain responsible for your VAT obligations on exports and cross-border B2B sales. The platform's VAT handling only applies to the specific scenarios above.

Record keeping for international sales

Robust record keeping is essential for international e-commerce VAT compliance. HMRC can request evidence years after a transaction.

Records to keep for all international sales

• Customer details (name, address, and for B2B: VAT number)
• Date and value of each supply
• Description of goods or services
• VAT charged (or note that supply is outside UK VAT scope)
• Country of destination

Additional records for zero-rated exports

• Export evidence (customs declaration, departure message from CDS, CMR note)
• Proof goods left the UK within 3 months of sale
• Shipping documentation and tracking

Additional records for digital services to EU consumers

• Two pieces of evidence of customer location
• VAT rate charged (by country)
• OSS return submissions (if using OSS)

Retention periods:

• Standard VAT records: 6 years
• Digital services location evidence: 10 years
• Export evidence: 6 years

Common mistakes to avoid

• Treating all overseas sales as zero-rated: Only goods physically exported are zero-rated. Services have different rules based on place of supply.
• Ignoring digital services rules: Digital services to EU consumers require you to charge local VAT rates and use OSS or register in each country.
• Missing evidence deadlines: Export evidence must be obtained within 3 months of sale. Without it, you're liable for VAT at the standard rate.
• Assuming B2B without verification: Always get your customer's VAT number and verify it before treating a sale as B2B.
• Forgetting about marketplace deemed supplier rules: Check whether the platform is handling VAT before you charge it yourself.