UK VAT for International B2B Sales: A Practical Guide for SaaS and Professional Services

The Core Principle: Understanding Place of Supply for B2B Services

For UK startups, landing that first international business customer is a major milestone. But right behind the celebration comes a question that trips up many founders: how do you handle VAT? The fear of getting it wrong, creating messy accounts, or facing questions from HMRC is real. Charging VAT incorrectly can damage a new client relationship, while failing to charge it when you should creates a future liability. The good news is that for most B2B services, the rules are more straightforward than they seem.

When determining UK VAT on cross-border services, nearly every question is answered by one core principle: the 'place of supply'. This concept dictates which country's tax rules apply to a transaction. For B2B services, the guidance is clear. The key fact to remember is, "The general 'place of supply' rule for B2B services dictates that VAT is due where the customer 'belongs'." (HMRC Notice 741A). In practice, 'belongs' means the country where their business is established or has a fixed base relevant to the supply.

This leads to a simple outcome for your international clients. As HMRC states, "For B2B services supplied to a business customer outside the UK, the service is considered 'outside the scope' of UK VAT." This means UK VAT law does not apply to the sale at all. You do not add the standard 20% UK VAT to your invoice. The transaction is effectively removed from the UK VAT system.

It is important to distinguish this from a 'zero-rated' sale. While both result in no VAT being added to the invoice, the classification is critical for your VAT return. 'Outside the scope' means the transaction falls completely outside the UK VAT system. A zero-rated transaction is subject to UK VAT, but the rate is currently 0% (like for children's clothing or books). The distinction matters for reporting, as we'll see later.

When you invoice a business customer in the EU, US, or elsewhere, you should indicate that the service is subject to the reverse charge mechanism. This is a simple note on the invoice, such as "Services subject to reverse charge". This notation signals to your customer that they are responsible for accounting for the VAT in their own country, as if they had supplied the service to themselves. This is the standard procedure for exporting services VAT UK rules and provides essential clarity for both parties' accounting.

Proof, Not Panic: How to Gather Evidence for International Sales

Declaring a sale as 'outside the scope' of UK VAT is not just a box-ticking exercise. If HMRC ever audits your records, you must be able to prove that your customer was a legitimate overseas business at the time of the sale. This is where many early-stage companies fall short, relying on a simple billing address which may not be sufficient. The goal is to collect and retain sufficient commercial evidence to build a defensible file for each international customer.

What counts as evidence? There is no single required document. Instead, you should gather a collection of proof points that reasonably demonstrate your customer’s business status and location. A scenario we repeatedly see is founders collecting a payment via Stripe but not gathering any other supporting information. What founders find actually works is proactively collecting two or three of the following for each non-UK business customer as part of your onboarding process:

• A valid local tax registration number: This is the strongest form of evidence. For an EU business, you can collect their VAT number and verify it using the EU's VIES (VAT Information Exchange System) website. For a US company, this would be their Employer Identification Number (EIN). Most countries have an equivalent business tax identifier.
• A certificate of incorporation or business registration: This document officially confirms the company's legal status and date of registration in its home country, proving it is a genuine commercial entity.
• Other commercial documents: Signed contracts, formal purchase orders, or correspondence on company letterhead all support their status as a business. These documents show a commercial relationship that is unlikely to exist with a private individual.
• A link to their business website: A professional website is a good supporting indicator. Check that the contact information, business address, and services offered on the website are consistent with the details they have provided to you.

Store this evidence digitally, ideally attached to the customer's record in Xero or your CRM. This simple habit addresses a major source of VAT compliance for UK startups anxiety and ensures you are always prepared for a query from HMRC.

System Setup: How to Charge VAT on International B2B Services from UK Systems Like Xero

Robust VAT compliance does not require expensive, enterprise-level software. For most UK startups using a standard financial setup, getting your systems configured correctly from the start is enough to manage UK VAT rules for SaaS and professional services. The key is to make the correct treatment automatic, reducing the risk of human error on each invoice.

In a tool like Xero, the process is straightforward. When you set up a new international business customer, you should assign them a default tax rate. Instead of choosing 'No VAT', you must use a specific rate designed for these transactions. For EU B2B clients, use 'Zero Rated EC Services'. For clients in the rest of the world (e.g., USA, Australia), you should use or create a rate for 'Outside Scope' services. This ensures every invoice generated for that client automatically applies the correct VAT treatment.

This coding is critical for accurate reporting. As a rule, "If an invoice's VAT rate is left blank instead of using a specific 'Zero Rated' code, the VAT return's Box 6 (total sales) may be inaccurate." Box 6 of your UK VAT return requires you to declare the total value of all your sales, including those outside the scope of UK VAT. If you simply use 'No VAT', your accounting software might exclude the sale from this total, leading to an under-reporting of your total turnover to HMRC. While no tax is due, the reporting must still be accurate.

For instance, if you make a £5,000 sale to a customer in Germany and code it with the 'Zero Rated EC Services' tax rate in Xero, that £5,000 will be correctly included in Box 6. This ensures your VAT return aligns with your company's financial statements. As your business scales, automated tools like Stripe Tax can handle VAT registration for international sales across many jurisdictions, but a well-configured Xero account is perfectly sufficient in the early stages.

Common Sticking Points and Edge Cases

While the general place of supply rule covers most scenarios for B2B services, a few common situations can cause confusion. Understanding these exceptions is key to maintaining compliance.

• Invoicing a UK Branch of a Foreign Company: The 'place of supply' is where the service is received. If you are providing services to a company headquartered in the US, but the team you are working with and who benefits from the service is in their London office, the place of supply is the UK. You must charge the standard 20% UK VAT, as the 'fixed establishment' receiving the service is in the UK.
• B2B vs. B2C Sales: The rules discussed here apply strictly to B2B sales. Selling directly to consumers overseas follows a completely different and more complex set of rules based on the consumer's location. For example, "The One-Stop-Shop (OSS) scheme governs VAT rules for selling B2C services to consumers in the EU." If you have a B2C or mixed model, you must investigate these separate requirements carefully.
• The 'Use and Enjoyment' Rule: For a very small subset of services, special 'use and enjoyment' rules can override the general place of supply principle. This typically applies to services like telecommunications, broadcasting, and the hire of goods. The rule prevents companies from routing services through non-VAT locations when the actual consumption happens elsewhere. For the vast majority of SaaS and professional services companies, this is an edge case you are unlikely to encounter.

A Practical Framework for International B2B Invoicing

Navigating VAT on international B2B services does not have to be a source of anxiety. For a UK-based startup selling to businesses abroad, the process can be simplified into a clear, repeatable workflow. By focusing on the fundamental principle of 'place of supply', you can build a compliant system from day one.

Here is a simple decision framework to apply for every new international business customer:

1. Identify your customer: First, confirm they are a business (B2B), not a private individual (B2C).
2. Determine their location: Establish that their business 'belongs' outside the UK.
3. Apply the rule: If the answer to both is yes, the service is 'outside the scope' of UK VAT. You do not charge the 20% rate.
4. Invoice correctly: Your invoice should show 0% VAT and include a note stating the service is subject to the 'reverse charge mechanism'.
5. Gather proof: Collect and store at least two pieces of commercial evidence confirming their business status and location.
6. Configure your system: Use the correct tax code in your accounting software (e.g., 'Zero Rated EC Services' or a custom 'Outside Scope' rate) to ensure accurate VAT returns.

Getting this right from the start keeps your accounting clean, prevents difficult conversations with clients, and ensures your financial records are solid. This foundation is essential for managing cash flow, passing any future investor due diligence, and building a scalable international business. For broader guidance, see the Sales Tax hub.

Frequently Asked Questions

Q: How do these VAT rules apply if my international client is a freelancer or sole trader?
A: The rules are the same. A sole trader operating a business is treated as a business customer for VAT place of supply purposes. The key is to gather evidence that they are in business, such as a tax registration number, a professional website, or a business bank account statement, to justify treating the sale as B2B.

Q: What happens if I forget to put the "reverse charge" note on an invoice?
A: Forgetting the note is a minor administrative error, but it is best to correct it. If you notice it quickly, you can issue a corrected invoice. While it doesn't change the UK VAT treatment, the note provides essential clarity for your customer's own tax accounting, so it's an important part of professional practice.

Q: Do I need to collect proof of business status for every single invoice to the same client?
A: No, you do not need to collect fresh evidence for every transaction. The best practice is to gather sufficient proof during the initial client onboarding process. You should then periodically review your customer records, perhaps annually, to ensure the information (like their VAT status) remains current.

Q: What if my customer is an overseas business but pays from a UK bank account?
A: The location of the bank account is not the deciding factor. The 'place of supply' is determined by where the business customer 'belongs'. As long as you have gathered sufficient commercial evidence to prove their business is established overseas, the payment method does not change the VAT treatment. The service remains outside the scope of UK VAT.