UK VAT rules for software/SaaS companies
Written by David Mytton — Subscribe now.
Last week our VAT (UK sales tax) registration came into effect. Unfortunately, the VAT rules were not drafted with international sales of software (as a service) in mind so we are faced with a relatively complex structure that must be applied to all our customers.
I spoke to our accountants to get an explanation of what we had to do and I present that below. Note that whilst this may help you understand what is necessary, it is tailored to our requirements and as such, should not be considered advice. Indeed, you should definitely speak to your own accountant to learn what you need to do. Tax is a very complex area and getting it wrong will result in fines.
I can recommend Complete Accounting Solutions as a company that knows the tech space very well.
The relevant legislation is VAT Act 1994, specifically paragraphs 7C(a) and 7C(b) of Schedule 5 which deal with “Electronically supplied services”.
This provides that VAT must be added to invoices where the customer is:
- based in the UK
- based in the EEC and is not a business
Further, there is a “use and enjoyment” override which means that whilst customers outside the UK/EEC would not normally be charged VAT, if they “use and enjoy” the service in the UK or EEC then VAT must be added i.e. they use our server monitoring service, Server Density, on servers hosted in the UK/EEC.
For the second point, we have to be satisfied that the customer is a business in the EEC by collecting their company and/or VAT registration details. And we simply ask customers if they a are “using and enjoying” within the UK/EEC for the exception.
Taken from the HMRC website, the 27 EU countries are the UK, France, Belgium, Luxembourg, The Netherlands, Germany, Italy, The Irish Republic, Denmark, Greece, Portugal, Spain, Sweden, Finland, Austria, Malta, Estonia, Latvia, Lithuania, Poland, Czech Republic, Slovakia, Hungary, Slovenia, Cyprus, Bulgaria and Romania.