Whether you charge VAT depends not just on what you sell but on where the customer is and whether they are a business or a consumer. Get the place of supply rules wrong and you can either undercharge (and end up paying the missing VAT yourself) or overcharge (and lose customers to compliant competitors). This guide covers the four cases most UK businesses meet: B2B services, B2C services, goods, and digital services.
Why place of supply matters
VAT is a destination-based tax. The country with the right to tax a transaction is generally the country where consumption happens, not where the seller is based. The "place of supply" rules tell you which country's VAT (if any) applies to a given transaction. Get them wrong and you may charge UK VAT when you should not have, or fail to charge when you should.
Two questions decide which rules apply:
- Is what you are selling a good or a service?
- Is the customer a business (B2B) or a consumer (B2C)?
Goods: where are they physically going?
For goods, the place of supply is essentially where the goods physically move to. The detail varies by destination:
| Customer location | What you charge | Notes |
|---|---|---|
| UK customer (GB or NI) | UK VAT at the appropriate rate | Standard domestic transaction |
| EU business customer | Zero-rated (with proof of dispatch and customer VAT number) | Customer accounts for VAT in their own country |
| EU consumer (B2C) | Depends on distance selling threshold | Once you exceed the EU-wide £8,818 threshold, you must register for OSS or in each EU country |
| Non-EU customer | Zero-rated as an export | Keep proof of export for HMRC |
Northern Ireland sits in a special position because of the Northern Ireland Protocol: NI businesses follow EU VAT rules for goods (but UK rules for services). GB businesses selling to NI customers treat it as a UK domestic supply.
Services: the general rule
For services, the default rule depends on whether the customer is a business or a consumer:
B2B services, reverse charge
If you supply services to a business customer outside the UK, the place of supply is normally the customer's country. You do not charge UK VAT. Instead, the customer accounts for the VAT in their own country under the "reverse charge" mechanism.
What you must do:
- Verify the customer is a business (collect their VAT registration number where applicable)
- Issue an invoice with the customer's VAT number on it
- Add the wording "reverse charge applies" or equivalent
- Include the supply value in Box 6 of your VAT return (but no VAT in Box 1)
Common B2B services this applies to: consultancy, advertising, IT, legal, accounting, design, software-as-a-service, financial services not covered elsewhere.
B2C services, usually UK VAT
If you supply services to a consumer (someone who is not VAT-registered), the place of supply is normally the supplier's country. So a UK consultant providing services to a French consumer charges UK VAT at 20%.
The big exception is digital services, which have their own rules.
Digital services to EU consumers (one stop shop)
If you sell digital services (e-books, downloads, streaming, software, cloud hosting, online courses) to consumers in the EU, the place of supply is the consumer's country, not yours. So you must charge VAT at the consumer's local rate, not UK 20%.
To avoid registering in 27 EU countries, you can use the Non-Union One Stop Shop (OSS). You register once (currently via the Republic of Ireland for UK businesses), submit a single quarterly return covering all your EU consumer sales, and pay one figure to that country's tax authority. They distribute the VAT to the right destinations on your behalf.
OSS only covers B2C digital services to EU consumers. B2B sales to EU businesses still use the reverse charge as normal.
Services inside the UK to UK businesses
The simple case: UK business sells to another UK business, charges UK VAT at 20% (or 5% / 0% as appropriate), customer reclaims it on their own VAT return. No place of supply complexity.
Reverse charge on construction services
Worth flagging: there is a domestic reverse charge that applies to construction services within the UK between VAT-registered contractors. If you are a sub-contractor charging another contractor for construction services covered by the Construction Industry Scheme, you do not charge VAT. The main contractor accounts for it on their return. This was introduced in March 2021 and trips up a lot of new construction businesses.
Quick reference decision tree
- What are you selling? Goods or services?
- Where is the customer? UK, EU, rest of world?
- Is the customer a business or consumer? If business, do you have their VAT number?
- If digital service to EU consumer: use OSS to charge customer's local rate.
- If services to non-UK business: reverse charge, no VAT, customer accounts.
- If services to UK customer (any type): UK VAT at the appropriate rate.
- If goods to non-UK customer: zero-rated with proof of export.
Common pitfalls
Assuming services behave like goods
The default place of supply for services is the customer's country (B2B) or supplier's country (B2C). For goods it is where they physically move to. Mixing these up creates a mismatch on the return.
Forgetting the reverse charge on overseas software
If you subscribe to Microsoft 365, Google Workspace, AWS, Adobe or any other overseas digital service, you usually need to account for reverse charge VAT on it. Same VAT amount appears in Box 1 and Box 4, netting to zero, but the gross goes into Boxes 6 and 7.
Not verifying EU business customers
If you treat a customer as a business and reverse-charge, you need their VAT number. Use the EU's VIES tool (ec.europa.eu/taxation_customs/vies) to verify it. If the number is invalid, HMRC may decide they were a consumer and chase you for the VAT you should have charged.
Once you know whether to charge VAT, the calculator handles the arithmetic.
Open the VAT Calculator