Digital products are a meaningful part of the UK economy: in 2023, they accounted for roughly 6.5% of total gross value added (GVA) in the country. The UK treats digital goods as a distinct category, which means that sellers have to follow a specific set of rules that shape everything from pricing to value-added tax (VAT) compliance. Understanding these rules helps businesses make the appropriate decisions regarding product design, checkout flows, and revenue strategy.

In this article, we’ll discuss how to sell digital products in the UK, including the VAT rules that apply and how digital product sales affect revenue operations.

What’s in this article?

• How can a business start selling digital products in the UK?
  
• How do UK VAT rules apply to digital products?
  
• What obligations do businesses face when selling digital products in the UK?
  
• What challenges arise when selling digital products in the UK?
  
• How does selling digital products affect revenue operations?
  
• How Stripe Payments can help
  

How can a business start selling digital products in the UK?

To start selling digital products in the UK, a business needs to choose a delivery model (e.g., downloads, subscriptions, account-based access) and set up a checkout that can handle digital fulfillment. Because digital products are taxed differently from physical goods, businesses also need systems that can apply the correct VAT rate, collect customer location evidence when required, and issue compliant invoices.

How do UK VAT rules apply to digital products?

For VAT purposes, His Majesty’s Revenue and Customs (HMRC) defines both “digital products” and “electronically supplied services” (ESS) by their delivery methods. If a product is delivered over the internet or an electronic network with a high degree of automation and minimal human involvement, it is considered an electronically supplied service. A sale that automatically sends a download link after purchase qualifies as a digital product sale; one that involves a manually emailed file does not.

VAT on digital products is based on where the customer lives. Most digital products sold to UK customers carry the standard 20% VAT rate. Certain digital publications qualify for a 0% rate, but only if the content isn’t primarily audio, video, or advertising.

VAT registration thresholds and requirements differ based on the relationship between the seller and customer. Here’s a closer look:

• UK business to UK customer: Registration is mandatory once sales exceed the £90,000 threshold, although some businesses register sooner. The company must collect two noncontradictory pieces of evidence (e.g., the customer’s billing address and IP address) to justify the UK VAT rate applied.

• Non-UK business to UK customer: The company must register for UK VAT from the first sale of digital goods into the country. It must report digital VAT, even without a physical presence. It also has the same evidence requirement as a UK business.

• UK business to EU customer: The company must either register in each EU country its customers are located in or use the non-Union One Stop Shop (OSS) scheme to report all EU digital sales through a single EU tax authority, even without having a physical presence in the EU.

Note that if a digital marketplace controls the transaction, it might be treated as the supplier for VAT purposes. In that case, the platform handles VAT collection and reporting.

What obligations do businesses face when selling digital products in the UK?

In addition to managing VAT, selling digital products in the UK means understanding a defined set of legal and logistical responsibilities. Here’s what businesses that sell digital products are responsible for:

• Respecting customer rights: Digital products must be as described, function as expected, and meet a basic standard of quality. If something doesn’t work, customers are entitled to a repair, replacement, or refund.

• Handling cancellations: UK law mandates a 14-day cancellation window for digital purchases, unless the customer agrees to immediate access. To deliver instantly, you must get explicit consent from the customer to waive this right.

• Providing clear prepurchase information: Before checkout, you must disclose details such as total price, VAT treatment, business identity, and how to request support or refunds. This is required under distance selling rules.

• Protecting customer data: Businesses that handle digital purchases must comply with the UK General Data Protection Regulation (UK GDPR), which governs how personal data is collected, stored, and used. This applies whether you’re selling a one-time download or a subscription service.

• Honoring intellectual property rights: You need the legal right to sell the digital content you offer, and you’re responsible for preventing unauthorized distribution. Many businesses rely on license terms, watermarking, or digital rights management (DRM) to protect their work.

• Maintaining compliant invoicing and recordkeeping: VAT rules require that you issue proper invoices, keep customer location evidence, and retain transaction records for audit purposes. These records must be accurate and accessible for several years.

• Staying current with regulatory updates: UK customer and digital regulations continue to develop, particularly regarding subscriptions and online transparency. Businesses must monitor these changes and adjust their practices accordingly.

What challenges arise when selling digital products in the UK?

The UK market is regulated and highly competitive. Here’s what that means for businesses that sell digital products:

• Changing regulations: VAT rules, consumer protections, and new digital regulations shift often. Businesses must track updates, such as those for subscription rules and transparency requirements, to avoid compliance gaps.

• Cross-border complexity: Digital sales often bring in international customers from the start. That triggers multiple VAT regimes, location-based tax rules, and separate reporting requirements for the UK and the EU.

• Saturated market: Digital products compete with local and global offerings, including free alternatives. Strong positioning, clear value, and consistent product improvement are important.

• Customer trust: Buyers can’t “see” or test a digital product before they purchase it so trust depends on clarity, credibility, and support. New brands might need social proof, transparent policies, or trial access to convert hesitant customers.

• Technical reliability: Customers typically expect instant access to digital products. Occasional downtime, slower downloads, or compatibility differences across devices can affect the customer experience and increase support or refund requests, if they’re not managed carefully.

• Digital-specific fraud: Intangible goods can become a target for card fraud and friendly fraud because delivery happens instantly. This raises chargeback risk and requires stronger fraud prevention and monitoring.

• Intellectual property: Digital files can be copied or distributed without permission. Businesses need to balance customer experience with measures that deter piracy.

How does selling digital products affect revenue operations?

Selling digital products introduces new accounting, billing, and logistical patterns. Be mindful of the following:

• Recurring revenue models: Many digital products use subscriptions or ongoing access rather than one-time sales. This requires systems that can automate renewals, handle proration, and manage churn.

• More nuanced revenue recognition: One-off downloads can be recognized immediately, but subscriptions, updates, and bundled services must be recognized over time. Businesses need tools that track performance obligations accurately and avoid manual spreadsheets.

• Global tax handling in billing: Because VAT depends on customer location, revenue operations need systems that apply the correct tax rate at checkout and retain basic location evidence. As sales grow, businesses might find that automated tax tools make this process more manageable and consistent.

• Multicurrency pricing and payouts: Digital products attract international buyers early, which means revenue teams will have to work with multiple currencies, exchange rate exposure, and different payment preferences. This can affect cash flow forecasting and reconciliation.

• Platform and payout timing: App stores, marketplaces, and subscription billing systems might pay out on varying cycles. This can impact cash flow timing, and it requires careful reconciliation with recognized revenue.

• Usage-based costs: Cloud hosting, bandwidth, and ongoing development aren’t tied to each unit sold; they scale with user activity. Revenue operations teams must connect these costs to growth so margins stay healthy.

How Stripe Payments can help

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Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods, and Link, a wallet built by Stripe.

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• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.

• Improve payment performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.

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Learn more about how Stripe Payments can power your online and in-person payments, or get started today.