In 2015, the EU saw a change in the regulation surrounding the VAT applied on the sale of digital services. These changes address how tax on these types of services is handled when sold to a buyer in another EU country. More specifically, it deals with the handling of VAT on digital services in an invoice template.
First, let’s clarify what qualifies as a digital service. While this term clearly covers online services such as radio broadcasting, telecommunications such as internet access and call management, it also covers more product-based services such as e-books, online images, music, games, websites, and more.
While this is quite a broad spectrum of ‘e-services’, it’s important to note that the taxation changes apply only when these services are purchased by an individual in another EU country. If the customer is a business, different rules apply.
How to apply VAT for sale of digital services to individuals
If your customer cannot supply a VAT number, it is up to your discretion to determine whether they are an individual consumer or registered company under their country’s VAT threshold. When it is an individual consumer, you can apply the rules related to the 2015 VAT changes and treat it as a business-to-consumer sale. In this case, you would apply the VAT of your customer’s country.
For example: if your customer is located in Spain and purchases your website management services, you would apply the 21% VAT rate of Spain, not the 20% UK rate.
If your customer is a registered business, it must be treated as a business-to-business sale, which means that your customer is responsible for accounting for the VAT as applicable in their country. In the event that you have b2b sales in other EU member countries, you will need to fill out a European Community Sales List declaration with HMRC. Learn more about [intra-community transactions] (/features/accounting/intra-community-transactions).
What to take into account when invoicing
When applying this VAT regulation to your invoicing, there are two aspects you should take extra care in ensuring that you clearly state the VAT rate used, and make note of this for your records to declare to the tax authority.
If you are unsure of the VAT rate you should be using for an individual consumer in another EU country, you can refer to the EU’s official page on electronic services.
And a final point to keep in mind, although it may seem quite obvious, it’s worth stating that in order to apply the EU VAT for digital services, you must be a company or professional residing and with a business based in an EU member state, with a customer also located in an EU member state.