Knowing which online orders require VAT can be confusing, especially as the answer isn’t always the same. So, for those wondering if SaaS is subject to sales tax, you’re not alone.
In short, yes, SaaS is subject to sales tax. However, this is called VAT in the UK. It is not referred to legally as a ‘sales tax’.
The rules and regulations around VAT aren’t a single standardised set across the board. While SaaS is subject to UK tax rates, the amount added depends entirely on where the order is placed.
To help make sense of complex regulations for SaaS tax in the UK, we’ll delve into what SaaS is, whether SaaS is subject to tax, and other factors affecting the amount required.
What Is SaaS?
Software as a Service (SaaS) is a business model that enables people to access specific software over the internet.
Instead of needing to download, install, and maintain the software on their own devices, SaaS allows users to gain access online via a cloud service provider. Typically, this is done through subscription, meaning those who wish to access the software via SaaS must pay a set fee.
You may have heard of some SaaS models. For example, productivity suites such as Google Workspace, Slack, or Zoom are all common examples of SaaS. Others include Adobe Creative Cloud, Netflix, or Canva.
Is SaaS Subject to Sales Tax?
Yes – SaaS is generally subject to VAT, which is what sales tax is legally referred to as in the UK. However, the rate varies depending on where in the world the order is coming from.
For customers based in the UK, the full 20% VAT rate applies. You must use this on all orders placed from the UK, regardless of whether they’re for use elsewhere in the world or if they’re for business or consumer use.
Business-to-business (B2B) customers within the EU do not need to be charged UK VAT. Instead, the customer calculates the VAT based on their country’s tax regulations, then reports and pays it themselves – this is known as a ‘reverse charge’.
For business-to-consumer (B2C) orders within the EU, you charge their local VAT rate; you don’t add on UK VAT. Meaning, a customer in Germany is charged German VAT, while a customer in Estonia is charged Estonian VAT.
Rules apply differently to customers outside the EU, including in the USA, Canada, or Australia. To see whether you need to apply VAT to your SaaS order, check out the table below.
| Where Was The Order Placed? | Do I add on VAT? | What VAT is Added On? |
| Within the UK | Yes, you add on VAT | Standard UK VAT rates are applied. Add on 20% VAT. |
| Within the EU (B2C) | Yes, you do add on VAT | Check VAT rates for the country the order was placed from. Apply them accordingly. |
| Within the EU (B2B) | No, you do not add on VAT | ‘Reverse charge’ applies. The customer calculates and pays VAT themselves. |
| Outside of the UK and EU (e.g., Canada, USA, Australia) | No, you do not add on VAT | No VAT is added to orders placed from outside the UK and the EU. |
What Are the Requirements for SaaS VAT Registration?
Yes, there are requirements to meet before you add VAT to SaaS registrations. However, there are benefits to adding SaaS sales tax even if you don’t meet these requirements.
To understand how this impacts you, we can explore mandatory requirements, as well as the benefits of voluntary registration. Knowing how these differ will help you make an informed decision.
Our tax advice team is always on hand to answer any questions you may have on VAT.
Mandatory VAT
You are legally required to add VAT to SaaS orders if your business’s annual turnover exceeds £90,000.
Once you reach this threshold, you must start charging VAT for SaaS products. Plus, you’ll need to follow relevant VAT rules, as well as start submitting VAT returns. Filing VAT returns can be a lengthy process, so it’s important to understand how these work.
Check out our step-by-step guide on how to file a VAT return, to ensure your business is ahead of any deadlines.
Voluntary VAT
You can volunteer to pay VAT even if your SaaS business doesn’t meet the mandatory threshold of £90,000.
You may be wondering why you should opt to pay a tax you’re not legally obliged to, but there are actually benefits to doing so. For example, if you register to pay SaaS sales tax, you’ll be able to reclaim VAT on eligible business expenses.
Tax on purchases such as software licenses, services, or equipment can all be claimed back when your business is registered to pay VAT.
DH Business Support Makes Managing Your Taxes Easy
Handling your own taxes can be time-consuming, confusing, and stressful. What if we told you that you don’t need to manage them alone?
Here at DH Business Support, we dedicate our time to supporting you, whether that’s handling VAT tax returns or organising your payroll. With our expert support, you can spend your time on other areas of your business, without worrying about who takes care of the rest.
Get in touch with us today to see how we can help you keep the day-to-day management of your business simple, seamless, and stress-free. Give us a call on 0330 088 1701 or send an email to hello@dhbusinesssupport.com.