Mastering VAT in the Digital Age: Key Tips and Strategies for Businesses
Content accurate as at 28.02.2023
On 8 December 2022, the European Commission (EC) published the VAT in the Digital Age proposal (ViDA). ViDA aims to modernise the EU’s VAT system for today’s digital world. If adopted, these matters will have a significant impact on how VAT is reported across the EU and are likely to affect all businesses in some way. These proposals will now be discussed by EU Member States and for the proposals to be adopted, they must be approved unanimously by all Member States.
EU VAT legislation has in many ways, not kept pace with technological advances, the digital economy and changes in business models. In addition, the current system is prone to fraud and evasion, with the EU-wide VAT revenue loss known as the ‘VAT Gap’ estimated to be €93 billion for 2020. There are also significant administrative burdens and compliance costs for both tax administrations and for businesses, in particular where they operate across the EU.
To reduce the VAT gap and to reduce the VAT compliance costs for businesses, the EC proposes the following three main pillars:
- A move to real-time digital reporting based on e-invoicing for businesses that operate cross-border within the EU;
- Updated VAT rules for the platform economy ; and
- A single VAT registration for businesses.
1. Digital Reporting and e–invoicing
It is proposed to make it mandatory for businesses to issue e – invoices for cross-border supplies of goods or services with the EU within two days of the tax point for that supply and to report the key data from each e – invoice to the relevant tax authority in an electronic format within two days from the issue of the invoice). It is proposed that these measures would come into effect from 1st January 2028.
Several EU Member States have already introduced forms of digital reporting requirements (DRRs), which have been successful in increasing VAT collection but have led to significant compliance costs due to a lack of harmonisation between Member States. The proposed new EU wide requirements would follow a common EU wide standard, thereby reducing the cost of multinational compliance.
E – invoicing would also become the default system for the issuance of invoices from 1st January 2028 with paper invoices only being permitted for certain transactions if Member States opt to allow them. The current requirement that the issuance of e – invoices must be accepted by the recipient will be removed.
Member States would be allowed to introduce similar digital reporting obligations for domestic transactions, but they must follow the same EU wide standard. In addition, EU Member States with existing DRR systems would have to adapt these to the harmonised EU system by 2028.
2. Platform economy
The key proposal under this pillar is to make online platforms liable to collect and pay VAT where they facilitate supplies of short-term accommodation and passenger transport in certain circumstances, which would be effective from 1st January 2025.
The rise of the platform economy has seen individuals and smaller enterprises supplying such services to a global audience often in competition with traditional VAT registered businesses. The new measures aim to level the playing field for VAT purposes between platforms offering such services without charging VAT (e.g. because they are below the VAT registration threshold) and traditional suppliers of similar services (who are typically VAT registered).
To achieve this a ‘deemed supplier’ model would be introduced for platforms operating in the short-term accommodation rental and passenger transport sectors. This means that the platform operators would be required to account for VAT on transaction they facilitate in scenarios where the underlying supplier does not charge VAT because they are, for example, a private individual or a small business not required to be VAT registered. Platform operators will also be required to keep records for other business to business (B2B) and business to consumer (B2C) supplies that fall outside the deemed supplier model.
The VAT treatment of the facilitation services provided by the platforms would be clarified under the new measures. Under the new proposals, such facilitation services would be treated as intermediary services (taxable where the underlying service is performed) which would allow for a uniform application of the place of supply rules for VAT purposes.
3. Single VAT Registration
The proposals aim to avoid or at least, minimise the need for multiple VAT registrations for the same legal entity across the EU by extending the existing One Stop Shop (OSS) regimes for B2C supplies and reverse charge mechanism for B2B supplies.
Under the proposals, the following rules would apply from 1st January 2025:
- The OSS (which currently allows suppliers to pay foreign VAT on certain digital services and online sales of goods) would be extended to include all remaining B2C supplies of goods and services where the supplier is not VAT registered in the Member State where VAT is due. This would include, for example, distance sales of second-hand goods, works of art, collectors’ items and antiques, as well as domestic supplies of goods.
- The OSS would also apply to cross-border movement of a business’s own goods (e.g. for consignment stock purposes), such that a local VAT registration would no longer be required.
- Mandatory use of the import one stop shop (IOSS) for platforms facilitating certain distance sales of imported goods with a value of less than €150. Platforms currently have the option to choose whether or not to use this scheme.
- Mandatory operation of the reverse charge mechanism for B2B supplies where the supplier is not established for VAT purposes and the customer is established in the Member State where the VAT is.
Please talk to us about digitising your business – we have considerable experience in helping our clients modernise and become more efficient with their bookkeeping.
Content accurate as at 28.02.2023.