The digitalisation of VAT is currently high on the EU political agenda. For example, the current president of the Council of the European Union, Portugal, will prioritise initiatives related to “the digital transformation of businesses and digital platforms, to the areas of e-commerce, payments and taxation”.[1] In this blog post we will dive deeper into the digitalisation of VAT in specific and show the benefits of digitalisation for both businesses and governments. Furthermore, we will discuss how real-time reporting can help to take the government’s digitalisation efforts to the next level!
Digitalisation of VAT in Europe: state of play
A prime example of the digitalisation of VAT can be found in the UK, where the HM Revenue & Customs (HMRC) introduced the campaign Making Tax Digital. This means that all “VAT registered businesses with a taxable turnover of more than £85.000 must follow the rules for ‘Making Tax Digital for VAT’ by keeping some records digitally”. From 1 April 2022 this threshold will be removed and it will be mandatory for all businesses. Besides keeping their records digitally, the Making Tax Digital for VAT rules also require businesses to send their VAT return digitally.[2]
The first evaluation of the programme was published in March 2020. In this document, the HMRC states that 1.4 million businesses are signed up to Making Tax Digital for VAT and that Making Tax Digital “has seen an overall reduction in scope for error and a perceived improvement in accuracy when compared with previous methods”.[3] Still, there is room for improvement. This improvement mainly concerns implementation costs, as found by The Tax Advisor Magazine. By conducting a survey, receiving 1,091 responses, The Tax Advisor Magazine found that many businesses exceeded the expected £109 implementation costs. “64.7% of respondents (455 responses) reported that their implementation costs were ‘over £109 but under £1,000’, while 11.7% (82 respondents) reported costs of over £5,000.”[4] This shows how difficult it is to estimate the costs of the implementation of such a system, when you are dealing with such a diverse landscape of businesses.
Other countries in Europe have gone through similar processes. However, almost all countries are digitalising in a different way. For example, multiple countries are digitalising VAT by making the Standard Audit File for Tax (SAF-T)[5] file mandatory. An example is Lithuania which started the roll-out of SAF-T in 2016. The electronic register of sales and purchases needs to be submitted (in XML) together with the VAT return by the 20th of the month.[6] Other countries, such as Portugal implemented a SAF-T requirement in a similar way, while Luxembourg only requires certain taxpayers to provide a SAF-T file on demand and not on a periodic basis.[7]
Digitalisation through real-time reporting
Governments that implement a real-time reporting system go one step further than the abovementioned digitalisation initiatives. It requires businesses to send (real-time or near-time) invoice information to the tax authority. An example of such a real-time reporting system is the Hungarian RTIR system. As of July 2020, all Hungarian taxpayers are required to provide real-time invoice information to the tax authority in XML format, while the invoice also needs to be sent to the buyer (in paper, PDF or e-invoice). In the latest update of the system (version 3.0.) businesses can integrate the real-time reporting process with sending the invoice to the buyer in an e-invoice format.[8] This tool is still optional as e-invoicing is not (yet) mandatory.
By combining e-invoicing with real-time reporting a 100% digitalisation of VAT can be realised. This combination is most widespread in Latin America, which is the birthground of real-time reporting systems. An excellent example is Chile. Chile started it’s endeavors to make VAT digital in 2002 by promoting the usage of e-invoicing with the ‘Ley 19799’.[9] However, only in 2014 e-invoicing became mandatory and a complete real-time reporting system combined with mandatory e-invoicing was born. This 100% digitalisation of VAT has many advantages such as cost savings, time savings and a reduction of the carbon footprint as there is no need to use paper invoices anymore.[10]
Noteworthy is that all real-time reporting systems, combined with e-invoicing or not, have the potential to offer pre-filled VAT returns. Again, Chile can be considered as the pioneer. The Andean country started in 2017 with pre-filled VAT returns. Currently 93.7% of all businesses make use of the pre-filled VAT return. The results are promising as surveys indicate “that declaring and paying the Value Added Tax […] is now 60% faster, and completing the Purchase-Sales registry is 70% faster.” Furthermore, the amount of errors are reduced, just as the amount of paper used. In the case of Chile, more than 8 million physical books per year are no longer used.[11]
Digitalisation through real-time reporting in a secure way
Real-time reporting solutions assisted multiple countries all over the world to digitalise VAT. However, existing real-time reporting solutions pose several security risks (as we previously mentioned before e.g. here and here). The main problem is that those systems store an enormous amount of invoice data on a centralised database. If this invoice data would be exposed (which unfortunately happens too often), it would seriously hurt businesses because invoice data contains pricing information. Think of the situation in which pricing information falls into the hands of a competitor, or even worse a foreign competitor.
In order to protect this valuable invoice data that is reported to the tax authority, invoice hashing offers a solution. We previously gave an introduction to invoice hashing on our blog. The key is that by hashing invoice information, the data is made unrecognisably different. The result is a fully encrypted fingerprint of the invoice data. This is relevant for real-time reporting, because the point of real-time reporting is that businesses can no longer register different invoices than their counterparties. To achieve this, authorities don’t have to know the exact content of the invoices. They only have to know if the fingerprint stated in the bookkeeping of the supplier is the same as the one stated in the bookkeeping of the supplier. This can be achieved by only storing a fingerprint of the invoice. In other words, this enables tax authorities to achieve the same results as existing real-time reporting solutions without storing any valuable invoice data.
When a real-time reporting system would be implemented in the above described way, VAT can be digitalised while offering the maximum protection to the companies’ pricing information.
In case you want to learn more about how summitto’s real-time reporting system exactly works and how it benefits both the public and private sector click here. For questions, shoot us a message at info@summitto.com
[2] See a list with specific requirements here: https://www.gov.uk/vat-record-keeping/making-tax-digital-for-vat
[4] https://www.taxadvisermagazine.com/article/making-tax-digital-survey-results
[5] SAF-T is an international standard for electronic exchange of reliable accounting data from organizations to a national tax authority or external auditors. The standard is defined by the Organisation for Economic Co-operation and Development (OECD). For more information see: http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/technologies/45045602.pdf
[6] https://www.avalara.com/vatlive/en/country-guides/europe/lithuanian/lithuania-i-mas-saf-t.html
[7] https://snitechnology.net/en/product/saft-luxembourg
[9] https://www.bcn.cl/leychile/navegar?idNorma=196640
[10] https://www.siigo.com/blog/empresario/facturacion-electronica-chile/
[11] https://www.ciat.org/Biblioteca/Estudios/2020-ICT_STL_CIAT_FMGB.pdf