Q&A: VAT in the Digital Age

The VAT gap – the difference between the estimated VAT revenue that is owed versus the amount that is collected – is a growing problem in the EU and an expensive one. The European Commission’s 2022 report on the VAT gap revealed a €93bn in loss of VAT revenues for member states in 2020 (tinyurl.com/euvatgap2022). One-quarter of this amount is attributed to fraud related to intra-EU trade.

In response, in December 2022, the commission announced its VAT reform proposal, known as VAT in the digital age (ViDA). The main objective is to modernise and develop a more robust VAT system in combating fraud and tax evasion. In May 2024, the Economic and Financial Affairs Council was due to reach an agreement on the implementation of the ViDA reforms but failed to do so following a veto vote from Estonia.

While timelines are yet to be finalised, businesses must start preparing to adapt to the upcoming changes.

What are the aims of the ViDA reforms?

The reforms aim to reduce the EU’s VAT gap by simplifying VAT obligations and reducing costs for businesses and EU tax administrations who are handling the high volume of data generated from the digital economy. This shift will allow businesses to focus on more strategic functions, leading to increased cost savings and efficiency in handling VAT reporting obligations.

The second goal of the reform is to combat VAT fraud. To address this, ViDA will introduce real-time digital reporting for VAT purposes and e-invoicing. This will provide member states with the information they need to reduce VAT fraud, especially carousel fraud.

The shift to e-invoicing is projected to reduce VAT fraud by up to €11bn annually within the next decade and to reduce administrative and compliance costs for EU traders by €4.1bn a year (tinyurl.com/euvidadec2022).

What do the new measures entail?

Digital reporting requirements (DRRs) – all businesses undertaking intra-EU business-to-business (B2B) supplies will be required to issue and receive e-invoices and report these transactions within two days of issuing the invoice. DRRs can be divided in periodic transaction controls, such as the standard audit file for tax (SAF-T), and continuous transaction controls, which mean real-time reporting or mandatory e-invoicing. This requirement means that businesses will be aligned issuing e-invoices according to EU standard EN16931.

Platform economy – platform economy operators, such as short-term accommodation rentals and passenger transport services, will be required to collect and disclose VAT to tax authorities where their suppliers do not. An agreement on this has yet to be reached, with Estonia seeking a compromise for member states to choose whether to comply with supplier obligations on ride and accommodation platforms.

Single VAT registration – this will allow companies to register once only across all EU countries, reducing the burden and administrative issues of having to file in each country independently. Also, an extension of the reverse charge mechanism from Article 194 of the VAT Directive is proposed. The one-stop shop (OSS) scheme for e-commerce is expanding to cover domestic sales of goods from non- established suppliers to consumers, along with other business-to-consumer (B2C) supplies. Additionally, a new OSS regime for cross-border transfers of own goods is being introduced.

How should businesses prepare?

Businesses need to have a comprehensive understanding of their presence and transactions in EU countries. This will require them to monitor their supply chains and establishment statuses. Firms must also be aware of the different changes and requirements in each EU country so that they can collect and track the necessary information.

Additionally, businesses should review proposed changes, analyse their impacts, and integrate them into their day-to-day operations. This will require advance planning to make the adjustments needed across internal systems or seeking third-party support to meet compliance deadlines set by different tax authorities.

Adapting to new obligations, particularly in the areas of e-invoicing and digital reporting, could be challenging for small and medium-sized enterprises. The move towards digitalisation promises long-term efficiencies, but in the short term, businesses may struggle with the phased implementation affecting business-to-government (B2G), B2C, and B2B transactions across different countries. Compliance in each country may require a patchwork of partners, which could lead to difficulties and additional costs. Instead, firms should look for a dedicated support team that can navigate the multifaceted impacts of the reform.

Businesses should be investing in technology. Some will already be starting their digital transformation, so it is a matter of making sure that their provider can ensure their compliance to these new rules and future-proof them as best they can. Those who do not comply with these regulations risk losing their ability to conduct transactions in the EU.

In fact, the repercussions of not being ready could affect an entity’s ability to conduct business globally. It is predicted by 2025, almost 80% of organisations worldwide will have to switch to electronic invoicing to comply with VAT regulations or as a necessity of their business partners.

Simply put, keeping pace with the VAT system reform will enable companies to be competitive in the global market.