The challenge of global digital services taxes on online education
If you’ve ever had to complete a UK tax return, you’re probably familiar with old government adverts featuring Adam Hart-Davis and the slogan “tax doesn’t have to be taxing.” Having spent a fair amount of time on the HMRC website and filling in the associated forms, 'incredulity' is perhaps the most polite word I’d use to describe my feelings about that slogan. I don’t think I’m alone in this, and I’m sure that will be music to all accountants' ears.
Tax might seem like an unusual topic for an article, but tax in relation to online distance learning is currently a challenge for higher education providers. This is due to an increasing number of countries introducing goods and services taxes on digital services and the evolving nature of this area of taxation.
Aren’t digital services taxes simple there to tackle multinationals?
The area of digital services tax is typically more strongly associated with measures designed to target large multinational digital companies, like Google, Amazon, Facebook, or Apple, which generate significant revenues from users in different countries. This type of tax was introduced in the UK in 2020 for that very reason and is a tax on the revenues of search engines, social media services, and online marketplaces.
However, taxes on digital services are not limited to this, and in 2015, the UK and the European Union (EU) also started applying Value Added Tax (VAT) on digital services. UK businesses supplying digital services to UK consumers had to pay UK VAT for those services. Additionally, business-to-consumer (B2C) digital services were also subject to VAT in the country where the consumer is located.
So, for instance, if you’re a UK company offering a digital service to consumers in France, then French VAT will be due. However, the EU also set up something called the VAT Mini One Stop Shop (MOSS), which essentially streamlines the payment of VAT and means businesses don’t have to register with tax authorities in every EU country where they sell digital services.
Aren’t HEIs exempt from these taxes?
Most UK higher education institutions (HEIs) are exempt from UK VAT, but this isn’t automatic; there are certain criteria that must be met to be designated as an “eligible body.” This includes being a non-profit-making and non-profit-distributing body and being registered in the ‘Approved (fee cap)’ category on the register maintained by the Office for Students (OfS).
Ultimately, this means they don’t have to charge students extra tax (VAT) on their tuition fees. All very straightforward and not taxing at all. However, online distance education complicates matters because students may be based in other countries, and there could be tax liabilities in the country where the student is located.
One of the great benefits of digital technologies and the internet is the global reach and connectedness they provide. For online education, this means institutions can attract and provide education to students worldwide. However, the emergence of digital services taxes means that tax implications are not solely determined by UK tax rules.
A key concept in digital service tax is the place of supply, i.e., the country in which the student or consumer is based. This essentially brings providers within the scope of the tax rules of other countries.
What is a digital service?
So far, I’ve skirted around the question of what a digital service is in the context of online education. This is a slippery area, and in terms of UK government definitions, there is an interesting dichotomy. In UK government terminology, online education falls under the sub-category of “electronically supplied services,” but interestingly, not all types of online courses are classified as such.
Based on examples provided on the UK government website, an online course consisting of pre-recorded videos and downloadable PDFs — essentially an unsupported, asynchronous-only course — is classed as a digital service. If you’re a business providing this kind of service to a consumer (B2C), then UK VAT rules apply.
However, an online course that includes pre-recorded videos and downloadable PDFs plus support from a live tutor is not classed as a digital service, and UK VAT rules do not apply. Similarly, live webinars are also not classified as digital services.
Within the realm of digital services tax, there appears to be a common distinction between supported and unsupported courses, and to some extent, there is ambiguity about whether that support needs to be synchronous or asynchronous.
This type of distinction has extended to other places; however, the EU, for example, is instigating changes in 2025 that challenge this. One major change relates to the place of supply. Whereas previously, you’d only be liable for VAT on running paid-for live virtual events in the country where your business is based (e.g., the UK), from 1st January 2025, you’ll be liable for VAT based on where EU consumers are located.
In UK tax terms, some of this may be irrelevant to UK HEIs, as they are exempt, regardless of whether the online course is or isn’t a digital service. However, as this is a fast-moving area of tax, the EU’s move suggests that online courses involving live synchronous elements and even live tutor support may increasingly be drawn into the scope of digital services tax more widely.
It is taxing…
The tax implications that are most important for UK HEIs providing online distance education are not those in the UK but those being implemented and adapted in other countries. This is particularly challenging because there isn’t a one-size-fits-all rule; instead, potential tax implications need to be understood and explored on a country-by-country basis.
It is necessary to determine whether your type of service or course is designated as a digital service, how the place of supply rules work, whether live educator support means that only the tax rules where you’re based as a provider apply, or if the tax rules of the country where the student is based apply.
Some UK HEIs have already been registering for VAT in different countries and have begun adding tax to online students' tuition fees based on the tax liabilities in their countries. This includes countries such as India, where the goods and services tax on digital services is currently 18%, and Australia, where the rate is 10%.
Despite what those adverts might have claimed, digital service tax and UK HEIs' liability to pay tax based on the location of their online distance learning students is indeed taxing. There isn’t a simple checklist; instead, liabilities must be determined with reference to the specific rules, definitions, and criteria within each country. In some cases, some HEIs may be liable in certain countries, while others might not, particularly if turnover thresholds are applicable.
For UK HEIs, these tax developments are likely to impact their propositions, and there are already instances where students from certain countries are paying higher fees due to tax being added. This also highlights a further distinction between online international students and on-campus international students, and perhaps a similarity in terms of a fee mark-up but driven by very different factors.
What is clear is that UK HEIs that have not yet explored the potential implications of the increasing implementation of digital services tax for cross-border online education activities should start doing so. This will also require regular monitoring due to the dynamic nature of this relatively new type of tax and its continued evolution. This tax is definitely taxing, and consulting a tax expert is a worthwhile investment.
