When Billing Systems and VAT Collide, Tax Teams Face Challenges

Usage-based billing has become the default pricing model for artificial intelligence and software as a service products. Commercially, this makes sense. Pricing follows consumption. Usage is metered, rated, and billed later. Customers avoid paying for unused capacity. Providers can scale revenue with real demand.

However, this shift moves value-added tax risk into places tax teams don’t traditionally control.

In usage-based models, the main issues are rarely rates or classification (although these can occur as well). They are timing, data flow, and system design. Prepayments, unused credits, and delayed true-ups are the points where usage-based billing most often breaks down in practice. Not because the VAT rules are unclear, but because the underlying systems are not designed to reflect how VAT actually works.

For tax teams, the biggest risk in usage-based billing isn’t misunderstanding VAT—it’s assuming the system already handles it.

The Issues

Free usage and zero-priced consumption. Free tiers are everywhere. AI tools offer free tokens. SaaS platforms include usage allowances; training tools provide trial access.

Genuinely free usage, with no payment and no linkage to a paid plan, generally sits outside VAT. Problems arise when free usage is bundled into paid access. If a customer pays for access and part of the usage is labeled free, that isn’t a separate supply. It is a pricing decision. VAT follows the consideration actually paid, not internal labels.

Systems that treat free usage as non-taxable events while taxing the rest risk splitting a single supply into artificial parts. Again, this is a system design issue rather than a legal one.

Prepayments and unused credits. Once credits are purchased for future use of a defined service, VAT is generally triggered at the moment of payment. Declaring VAT only as credits are consumed pushes tax into later periods than allowed. If credits expire unused, VAT doesn’t reverse itself. The tax was due on the original payment, so expiration doesn’t undo that obligation.

Prepaid usage exposes a familiar tension between accounting and tax. Billing systems often treat credits as liabilities until they are used. Revenue is recognized gradually, but VAT isn’t. This difference creates permanent reconciliation gaps between financial statements and VAT returns.

The picture changes if the service to be supplied, its place of supply, or the applicable VAT rate isn’t known when the credits are sold. In that case, VAT isn’t due upfront.

Tax is triggered only when the credits are redeemed for specific services. On that logic, unused credits shouldn’t in principle cause any VAT liability.

In practice, this position is increasingly contested. Tax authorities may argue that nonrefundable credits aren’t merely a prepayment for future use, but consideration for the right to access capacity or availability. If that view is taken, expiration itself crystallizes a taxable event.

The leading reference point comes from the airline sector. In the Air France-KLM case, the airline argued that tickets not used by passengers were non-taxable because no transport service was performed. The Court of Justice of the European Union rejected that argument. The service supplied was the right to travel. By making the seat available, the airline had fulfilled its obligation.

True-ups and delayed settlement. True-ups are a common feature in enterprise contracts and are used where customers pay a fixed amount during the year and actual usage is reconciled later. Usage accrues continuously, but billing for the difference is postponed.

A typical example is an AI or cloud platform that charges a minimum monthly fee and settles the full usage once a year. If the customer’s actual consumption exceeds the minimum, the excess is billed through a year-end adjustment.

From a VAT perspective, this structure carries risk. Where the service is supplied on an ongoing basis, tax authorities may take the view that VAT on the excess usage accrued month by month, even if it wasn’t billed at the time. In that case, VAT should have been declared gradually in each reporting period, not all at once at year end.

Issuing a single true-up invoice at the end of the year compresses 12 months of VAT into one period. Even if the total VAT paid is correct, the timing isn’t. In many jurisdictions, that timing mismatch is enough to trigger interest and penalties for late payment.

Incorrect service mapping. Another recurring issue is service classification. New usage-based services are often mapped to generic digital services codes by default.

That works until the service isn’t automated. Live training, human support, and consulting follow different VAT rules than automated software access. Mapping them all as digital services leads to incorrect place of supply outcomes.

Bundled offerings make this worse. SaaS packages frequently combine automated access with human elements. Case law requires looking at the principal element of the supply.

Consider a subscription priced at 1,000 euros that includes software access and a monthly one-hour strategy call. If the call merely helps the customer get more value from the software, the whole package follows the rules for automated services. If the call is a distinct objective, the supply may need to be split.

If split, different place of supply rules may apply. In cross-border consumer sales, this can change which country’s VAT is due. Errors here don’t come from misunderstanding the law. They come from systems that can’t represent mixed supplies properly and therefore default to a single treatment.

Billing engines often reinforce this problem by forcing everything into one invoice line under one tax logic, even when the underlying services should be treated separately.

Recurring Problems

The critical questions are operational:

• Where is usage aggregated?
• When does VAT get calculated?
• How are prepayments treated in practice?
• What happens when data is corrected?
• Can usage, billing, and tax figures be reconciled without guesswork?

In usage-based environments, VAT compliance lives in system architecture, not in policy memos. Tax teams need visibility into how those models are implemented. That is where attention should be focused.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Aleksandra Bal is global tax technology lead at Stripe and a frequent contributor to tax publications and industry conferences.

Write for Us: Author Guidelines