VAT in the Digital Age
The European Commission (EC) has adopted and published its proposed changes to the EU VAT Directive in order to bring the VAT rules up to date with the digital age and introduce measures to reduce the VAT Gap, which the latest report shows is 93 billion euros for 2020.
There are three pillars to the proposed reforms
- Real time digital reporting based on e-invoicing for cross-border supplies in the EU.
- Updated VAT rules for supplies of passenger transport and short-term accommodation via platforms.
- The introduction of an enhanced One Stop Shop (OSS) single VAT registration across the EU.
If agreed, the changes will take place at different times between 1 January 2024 and 1 January 2028.
1. Real time reporting and e-invoicing
A number of member states have already introduced variations of real time reporting systems so that they receive detailed information about transactions so as to have a better collection of VAT. Where this has been introduced, it has been calculated that there was an annual increase of VAT revenue of between 2.6% and 3.5%. The EC proposes to extend this across all member states by introducing the following.
- Real time reporting for intra-EU B2B supplies, with the data provided to the tax authority within two days of the issue of the invoice.
- Mandatory use of e-invoicing for intra-EU supplies with invoices including more information than is currently the case. The e-invoice will be based on the EU standards.
The introduction of real time reporting for intra-EU B2B supplies will mean that it will no longer be necessary to submit EC Sales Lists as the tax authorities will receive considerably more information under the new regime and more quickly than previously.
Member states will also the ability to mandate that e-invoicing is applied to domestic transactions and will not have to gain permission from the EU to do this, as is currently the case.
For those member states that already have digital reporting requirement mechanisms in place (such as Spain and Hungary), they will have to converge to the new EU standard mechanism by 1 January 2028.
All of this will come at significant one-off costs estimated at 11.3 billion euros for taxpayers and of 2.2 billion euros for tax authorities in order to put in place these new systems. The EC considers that there should be annual on-going savings of 4 billion euros as a result of reduced administration due to tax authorities being able to populate VAT returns with the data received and the removal of EC Sales Lists. The estimated benefits are 11 billion euros per year of additional VAT revenue due to a reduction in VAT fraud.
These changes would come in over the period from 1 January 2025 to 1 January 2028.
2. Changes to the platform economy
The explosion of platforms providing short-term accommodation and passenger transport has resulted in significant challenges for tax authorities and a distortion of treatment for traditional players in this sector.
The proposed changes will mean that the platform is liable to account for VAT when the underlying supplier does not, for example because they are an individual or small business. The proposals would also mean that supplies of short-term accommodation and passenger transport would not be eligible for the Tour Operators Margin Scheme, whereby businesses only account for VAT on the profit margin achieved.
The EC estimates that the amount raised would be 6.6 billion euros per year.
These changes would come into effect on 1 January 2025.
3. Single VAT registration
The expansion of the One Stop Shop (OSS) and introduction of the Import One Stop Shop (IOSS) on 1 July 2021 reduced the number of VAT registrations needed for many businesses, allowing them to trade more easily around the EU. However, there were a number of exclusions from the schemes and the new proposals seek to reduce the requirement to be VAT registered even further. This is part of the long term aim to reduce the administrative burden for businesses.
These proposals will see the OSS be extended so that it covers a number of transactions which were previously excluded thereby allowing a wider range of businesses to use the simplification. A significant one of these will be the movement of own goods between member states, which should be particularly beneficial to retailers using multiple warehouse arrangements.
The EC has chosen not to increase the IOSS limit of €150 at this stage, primarily because of the challenge on what to do with customs duty which is due on consignments above the IOSS threshold. Any further changes to IOSS will be within the framework of customs reform under the Customs Action Plan. However, IOSS will be made mandatory for sales made via platforms – currently it is optional although a significant amount of the VAT collected via IOSS is from sales on platforms.
The EC estimates that this will remove significant numbers of VAT registrations and will cut the compliance costs of businesses by 8.7 billion euros between 2023 and 2032.
These changes are proposed to be effective from 1 January 2025.
Next steps
These proposals will now be sent to the European Parliament for consultation ahead of being adopted. At this stage the VAT Directive and the applicable regulations would be amended to reflect the changes set out above.
Any business operating in the EU is likely to be impacted by these changes and they should start considering what it will mean for them. In some cases, there will be opportunities to create efficiencies around reporting obligations especially for those in the retail and manufacturing sectors. However, the introduction of e-invoicing and other digital reporting requirements will mean changes to existing IT systems and tax management processes, which should be considered in a timely manner so as to be prepared appropriately.
If you have any questions please do not hesitate to get in touch with Rob Janering, or your usual Crowe contact.
