Get ready for digital VAT

With EU member states keen to close the VAT gap – they lost an estimated €93bn in VAT revenue in 2020 – businesses operating in Europe have come under greater pressure to adopt fraud-reducing digital VAT solutions. There are a number of upcoming regulatory changes that businesses should be aware of.

In December 2022, the European Commission proposed a series of changes to the EU’s VAT system to make it more compatible with the digital world, with the primary aim of reducing tax evasion. The proposals, known as the VAT in the Digital Age (ViDA) initiative, are still under negotiation, but they are expected to be phased in between 2024 and 2028.

The key changes proposed by ViDA are structured around three core themes:

• Digital reporting. Near-real-time and continuous transaction controls will be implemented across the EU. This will require businesses to report VAT information on all transactions within a short period, which will make it more difficult to evade tax. The first phase is scheduled to roll out as early as 2024, but the main intra-EU e-invoicing and digital reporting regime will be made mandatory in 2028. The proposal will facilitate domestic systems for reporting local transactions rather than an EU-wide regime, provided they are in line with EU principles. With countries such as Italy and France already operating widely different domestic regimes for continuous transaction controls, this will make the digitisation process a little more complicated.
• Online platforms. There will be a change in the way that VAT is treated for the platform economy. Under the current rules, businesses that facilitate online transactions, such as Airbnb and Uber, are not always required to collect VAT. ViDA will subject all businesses in the platform economy to the same VAT rules from January 2025.
• VAT one-stop shop. There will be an expansion of the single VAT registration zone, or one-stop shop, which allows businesses to register for VAT in a single EU country and file VAT returns from that country for all its EU sales. ViDA will expand the scope of the one-stop shop to include more transactions, making it easier to comply with VAT rules.

Non-compliance

The upcoming changes will inevitably make it more difficult for businesses to avoid making VAT compliance errors, as they will have to learn an entirely new system in a short period of time. As a result, accounting and finance teams will need to be extra careful in their compliance efforts.

Several risks are associated with non-compliance, the most obvious one being financial penalties such as fines and interest payments. Others include reputational damage and protracted audits, which could hit relationships with trading partners if the tax authority needs to investigate their records.

Alongside digitisation comes a shift in the way that compliance is evaluated. With tax authorities having more access to transactional and other economic data than ever, there is likely to be less room for interpretation in compliance. In the past, tax authorities would often give businesses the benefit of the doubt if there was any ambiguity in the law, as the courts have often upheld standards of ‘reasonableness’. However, as digitisation has made it easier for tax authorities to track transactions and other economic data, they are now less likely to overlook compliance irregularities. With this in mind, businesses will need to be more precise in their compliance efforts.

As member states roll out domestic real-time reporting mandates, such as France in 2024, businesses should prepare for both domestic and EU-wide changes to the VAT system by developing a comprehensive compliance strategy. This strategy should include measures to ensure they are collecting and reporting VAT correctly, as well as mitigating the risks associated with non-compliance.

Risk mitigation

Staying ahead of the curve is the key to total compliance. First and foremost, ViDA is essentially going to dictate all VAT compliance rules across the EU. In other words, businesses that have not yet digitised their VAT reporting will need to start moving towards implementing new technology and processes. This can be a long and expensive process, and it is important to start planning early and seek support from a qualified IT partner.

A common mistake that businesses make is underestimating the work that needs to be done to ensure data quality and the long adaptation cycles that different business applications will need to undergo to incorporate the data and process changes required for real-time reporting and e-invoicing. Businesses that don’t acknowledge these risks and fail to act fast will be more vulnerable to costly delays and compliance problems. To give an idea of the hefty costs, digitisation is expected to cost EU businesses around €11.3bn between 2023 and 2032.

Another factor to consider is how new e-invoicing and e-reporting regulations will affect any current EDI (electronic data interchange) systems that your company has in place, such as customer communications management, procure-to-pay or accounts payable automation software of SaaS services, e-billing presentment, order-to-cash, and payment solutions. Considerations might include whether your systems are able to generate and receive e-invoices in the correct format, and, if not, what the cost of upgrading them will be.

Future of VAT

While businesses may fear the future of VAT compliance, they can count on one thing: the long-term benefits of the changes will outweigh the short-term difficulties. By integrating new technology into the compliance process, businesses can solve admin issues they may not have been able to before, and streamline long-winded internal processes. In addition, the new software can provide advanced data insights that benefit businesses in a variety of ways.

According to a KPMG study, approximately €51bn in VAT administrative costs will be saved by taxpayers between 2023 and 2032.

The changes to the VAT system present both challenges and opportunities for businesses. If prepared for and implemented correctly, there will be huge reward for both businesses and the economy in the years to come.