High levels of VAT fraud across Europe have resulted in a rapid move towards digital reporting requirements across member states, which will affect UK exporters, explains Alex Smith, director, consulting services at Sovos EMEA
VAT digitisation has arrived in Europe. Across the continent its popularity with tax authorities is driven by the greater visibility it provides into businesses. Digitisation also provides the opportunity to close long-standing VAT gaps and generate greater revenue.
According to the European Commission, member states lost €93bn (£81bn) in VAT revenues in 2020. With a new wave of reform, businesses operating in Europe are rushing to accommodate digitisation to avoid facing penalties from non-compliance.
What is ViDA changing?
In December last year, the European Commission announced the VAT in the Digital Age (ViDA) proposals, created to regulate and tighten tax digitisation across the EU.
The main aim is to create a system more compatible with today’s way of doing business, one which is increasingly digital. The Commission is looking to make the current VAT system more resilient to fraud, pushing a unified digital approach. This means businesses operating across the region will be required to get organised to remain compliant with new regulations. Although the UK is now outside the EU, the rule change will have implications for businesses exporting to member states.
So, what are the key changes businesses need to be aware of? The proposals can be broken down into three main areas:
The first aims to introduce digital reporting – real-time and continuous transaction controls (CTCs) – across the EU with the most immediate phase due in 2024, but the main intra-community business to business (B2B) supplies reporting mandate due to come into force in 2028.
The proposals will allow domestic systems rather than an EU wide regime, provided they are in line with EU principles. Since countries such as Italy and France operate widely different domestic CTC regimes, this will make the digitisation process more complicated.
The second area discusses VAT treatment of the platform economy, which will ensure online businesses (the likes of Uber and AirBnB) are subject to the same VAT regulation as every other business in this field. This will apply from January 2025.
The final change, also from January 2025, will likely have a positive impact in terms of helping businesses to remain compliant. It will expand the scope of the single VAT registration zone or One-Stop-Shop (OSS) and make the reverse charge mandatory for non-resident suppliers, meaning companies which operate across multiple EU states will reduce the need to register in member states.
What are the risks?
With greater insight into transactional and other economic data from companies, and an overhaul of the existing system, room for mistakes is higher.
Accounting teams and finance departments are expected to learn and adopt new processes in a relatively short space of time and must be aware of the potential pitfalls they might face.
Of course, the most obvious risks of VAT non-compliance will still be financial penalties. The likes of fines and interest payments will remain in place. Companies can also face reputational damage as those found to be non-compliant will be scrutinised and often subject to protracted audits which could take months.
The tax authority might also have to look into the records and original documents of the audited company’s trading partners, negatively impacting partner relations.
Digitisation is likely going to alter to way compliance is judged. As tax authorities are given greater insight into transactions and other economic data, compliance is rapidly made a more binary position.
Before the introduction of digitisation, compliance was often a matter of legal interpretation and with courts upholding standards of ‘reasonableness’ which made tax authorities less inclined to penalise tax irregularities.
So, as member states also roll out domestic real-time reporting mandates, for example in France in 2024, companies need to prepare for both domestic and EU wide mandates, and with these the fact that compliance irregularities are more likely to be picked up on and called out by authorities.
How can companies avoid the risks?
The key to compliance is keeping up with the changes. As ViDA will dictate the use of digital reporting across the EU, companies that have not already digitised VAT compliance will have to undertake a long and likely costly process to implement the correct technology which can handle the huge quantities of data tax authorities will demand.
Many businesses will gravely underestimate the work that needs to be done to ensure data quality and the long adaptation cycles different business applications will undergo to incorporate the data and process changes required for real time reporting and e-invoicing. It has been predicted that digitisation will cost business across the EU €11.3bn.
Businesses that do not have existing software need to act now and seek providers which guarantee compliance with new EU wide regulations, rather than waiting for the deadline to come closer.
The complicated nature of the proposals and how they will interplay with pre-existing and ever-changing e-invoicing requirements, need significant foresight from companies and an awareness that regulatory changes might require a complete rethink of existing frameworks.
Many companies will already be using electronic data interchange (EDI) systems, the likes of procure-to-pay or accounts payable automation software of SaaS services, customer communications management, order-to-cash, electronic billing presentment, and payment solutions.
It is important to consider how these platforms will handle new regulatory requirements for e-invoicing and e-reporting. To avoid future problems, businesses should take these questions to software providers to ensure they are aware of upcoming reforms and ensure their service is reflecting this.
ViDA and UK exporters
With the UK no longer a member of the EU, UK exporters will likely wonder how ViDA might impact their ability to remain compliant when doing business in Europe.
ViDA is mixed news for businesses outside the EU, that operate in EU states. On the one hand UK exporters will stand to benefit from some of the proposed changes, such as the extension of the single VAT registration zone (OSS) and the ‘reverse charge’, meaning the number of countries an exporting business would need to register in for VAT will be reduced.
For many businesses this will reduce the risk of non-compliance and save administrative fees. However, on the other hand, UK businesses will need to comply with the new cross-border digital reporting regime, which will of course be an additional cost.
The future of VAT in the EU
While the future for VAT payment might be daunting at the moment, companies can rest assured that, if they act carefully, the long-term benefit of these changes will outweigh the short-term complication.
Adopting new technology will solve administrative issues – according to a KPMG study, the overall saving of administrative cost borne by taxpayers is estimated at € 51bn between 2023 and 2032.
New technology will also provide a complete streamlining of internal processes and if companies are careful to remain compliant, new software will provide advanced data insights to benefit internal processes.