Simplifying VAT rates - Sales
Overview 📘
When creating sales invoices in Xero, most businesses will only need to use two or three VAT rates. The correct rate depends on where your customer is based and whether they are a business or consumer.
This guide covers the standard VAT rates for sales of services. Different rules apply to goods or digital services supplied through EU platforms, so please contact us if you’re unsure.
✅ Common VAT Rates for Sales in Xero
| Type of Sale | Typical Xero VAT Rate | Description |
|---|---|---|
| Sales to UK Customers (B2B or B2C) | 20% (VAT on income) | Sales of services to UK customers are standard-rated. VAT is charged at 20% regardless of whether the customer is a business or individual. |
| Sales to Business Customers Outside the UK (including the EU) | Zero Rated Income | These sales are outside the scope of UK VAT. You do not charge UK VAT, as the customer is responsible for VAT in their own country under the reverse charge mechanism. |
| Sales of Digital Services to EU Consumers (B2C) | VAT OSS (local rate) | Digital services (for example, software, apps, or online subscriptions) sold to EU consumers may fall under the VAT One Stop Shop (OSS) system. You may need to charge VAT at the customer’s local rate. Contact us if you believe this applies. |
💡 Reverse Charge Wording for Non-UK B2B Sales
When selling services to business customers outside the UK, you must include a specific note on your invoice to comply with international VAT rules.
Suggested wording:
“This supply is subject to the reverse charge. In accordance with international VAT rules, no UK VAT has been charged. The recipient of this supply is required to account for any VAT due in their country under the reverse charge mechanism.”
💡 To make this easier, we recommend creating a separate invoice template (also called a “branding theme”) in Xero for non-UK customers.
💡 Key Considerations
- Digital services to EU consumers may fall under the VAT OSS scheme - check your total EU B2C sales and registration status.
- Goods sold outside the UK have different rules and may qualify as exports.
- If you sell both services and digital products, ensure you’re using the correct VAT rates in Xero.
- Always retain evidence showing where your customer is based (for example, business address or VAT number).
✅ Summary
- UK sales: charge 20% VAT.
- Non-UK business customers: use Zero Rated Income and add reverse charge wording.
- EU consumer sales of digital services: may require VAT OSS registration.
- Keep records of customer location and VAT status to support your VAT treatment.