VAT in the digital age

Announced on the 8th of December 2022 in the VAT Directive 2006/112/EC, the EC has detailed mandatory obligations under the pillar “digital reporting requirements 2025-2028”. The EC’s directive aims to recover billions of VAT lost each year from fraudulent invoices and fraudulent VAT claims. The new legislative package will help Member States prove in real-time the business VAT expected and the VAT claimed.

What does this mean for European Member State businesses who are not already using electronic invoicing processes? It’s time to transition from paper and PDF invoicing processes to electronic, structured formats!

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Digital reporting requirements: What has been announced?

The VAT Directive 2006/112/EC details two sections that involve European businesses and their invoicing processes:

   
1. Mandatory intra-community electronic invoicing
   
2. Mandatory business-to-business (B2B) intra-community digital reporting requirement

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Let’s break down what these mean for the average business.

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Mandatory intra-community electronic invoicing

The directive states that all businesses must have the processes in place to be able to receive and issue electronic invoices in their intra-community trades by 2028, complying to the European standard for e-invoicing (EN 16931). However, there is no provision of how invoices will be exchanged between a supplier and a buyer.

The existing legislation required that the issuance of electronic invoices is subject to the acceptance of the recipient. This requirement hindered Member States from implementing mandatory electronic invoicing. The directive changes the situation, imposing e-invoicing as the default means of invoicing. According to the proposal, Member States can choose whether or not to apply mandatory e-invoicing also for B2B domestic transactions, with the condition to keep the structured format to the European Standard. Clearance systems, where prior validation of the invoice by the tax authorities before submitting to the customer is needed, are not in scope of the directive.

Nevertheless, Member States with existing mandatory e-invoicing systems in place will need to align their reporting requirements to the pan-European one by 2028.

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Mandatory business-to-business intra-community digital reporting requirement

From 2028, all businesses will have to digitally report their intra-community business-to-business (B2B) transactions. The aim of this part of the directive is to improve reporting requirements, and therefore unlock the opportunities provided by digitalisation. Opportunities such as improving the VAT collection from tax authorities’ perspective and reducing the compliance burden and costs for businesses.

What does this mean for the average business? Each business must be able to digitally report each and every intra-community B2B invoice within two days of issuance. 

Many Member States looking to mandate this part of the directive may wish to use electronic invoicing to meet the digital reporting requirements. National tax administrations will share the data through a new IT system, so the recapitulative statements submitted by the companies will no longer be needed. Meaning that businesses must create a structured electronic invoice that either is sent to a central government platform for reporting purposes, or that the business’ e-invoicing provider can feed the relevant information from the invoice to the government, meaning no extra work for the business.

Electronic invoicing formats and models come in many shapes and sizes, usually dictated by each Member State’s tax authority. The EC’s new directive does not state which formats and models must be used, as long as they comply with the European standard for electronic invoicing (EN 16931) and guarantee interoperability with it.

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What is the aim of the new directives?

The main aim is to close Europe’s VAT gap, currently made up of billions of Euros from all Member States. By reporting each and every intra-community business invoice, Member States can prove the VAT declared and the VAT expected. This reduces VAT fraudulent claims and facilitates a higher VAT revenue income.

And what about the aim for businesses? At first glance it can seem that the new directives may not be in businesses' favour. However, the directives provide businesses a great opportunity.

Businesses have a chance to really look at their full supply chain process and evaluate if their procure-to-pay and order-to-cash processes can be more efficient. Electronic invoicing creates this opportunity by reducing manual invoice tasks and improving invoice visibility and payments.

The benefits don’t just stop there. The EC is also aiming to improve business digitalisation. Electronic invoicing is the first step but once businesses are already creating electronic processes, then why not go all the way to full procure-to-pay and order-to-cash digitalisation? Automatically process invoices, feed documents and data in any format to existing ERP and accounting systems, and eliminate the need for time-consuming manual supply chain financial tasks.

100% business digital automation is the answer. Mandating electronic invoicing is the first step for many businesses to realise the full potential.

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Will the new directives work?

Across the globe there are already many cases where electronic invoicing is helping to close the VAT gap. Countries such as Italy, who have almost 100% mandatory electronic invoicing, recovered billions in their short history of mandatory processes.

Many countries have since put B2G processes in place. As Member States will have to set-up a solution or system to meet the B2B digital reporting requirements, they may be encouraged to go all the way and mandate B2B electronic invoicing. Therefore, the main question is when will Member States start putting solutions in place