Insight & Analysis

Finding the value in EU tax changes

Published: May 2024

As finance ministers prepare to agree on reforms to the EU VAT regime, UK businesses that trade with the European single market should be thinking about what they need to do to ensure compliance.

Magnifying glass finding the percentage

In late 2022 the European Commission proposed a series of measures to modernise the EU’s VAT system and reduce losses that it estimates at around €60bn in 2021 (the most recent year for which figures are available).

According to the European Commission, around a quarter of these losses can be attributed directly to VAT fraud linked to intra-EU trade. It also accepts VAT arrangements in the EU can be burdensome for businesses – especially for SMEs, scale-ups and other companies who operate cross-border.

The VAT in the Digital Age (ViDA) proposal will lead to a number of modifications to invoicing such as the introduction of new mandatory fields on an invoice and potentially different ways of reporting invoice data for cross-border and domestic transactions.

In practice, ViDA will mean billions of PDF invoices in the EU will have to be converted to machine-readable formats explains Christiaan Van Der Valk, Vice President for Strategy EMEA at tax compliance software vendor Sovos.

“The impact of ViDA will be felt between 2025 and 2030 for different businesses,” he says. “It will remove current restrictions for EU countries to introduce their own domestic continuous transaction controls (CTCs) schemes from July 2025 and many EU countries that do not have such regimes yet are expected to accelerate the introduction of mandatory real-time reporting and e-invoicing over the next couple of years.”

CTCs are a set of processes that enable law enforcement agencies to view financial data relating to business activity in their countries.

Most UK businesses will need to comply with ViDA if they wish to trade in EU countries. But while compliance is expected to demand upfront investment, Van Der Valk suggests the long-term benefits in terms of having access to a rich stream of real-time data should outweigh the initial costs.

“This will offer UK companies that do business in the EU a competitive advantage,” he says. “Having access to the same level of real-time data insights that modern tax administrations demand when it comes to tax and compliance reduces long-term risks and costs and allows businesses to spot errors, overpayments and anomalies in their data.”

BDO partners Richard Hogg and Tom Kivlevan agree there are a number of areas in which businesses outside the EU who operate within the EU will benefit, particularly the proposals to extend the ‘reverse charge’ and ‘one stop shop’ rules.

The proposed reform of the current arrangements when businesses move stock to a member state prior to sale should also be helpful. Collectively, these changes should minimise the number of VAT registrations an exporting business requires in the EU and, therefore, reduce their administration costs.

From a technical perspective, processes will need to be put in place to meet specific document exchange orchestration, transmission protocols and authentication for e-invoicing and e-reporting, and the new rules are also expected to have an impact on businesses’ upstream data.

“This is important from a CTO or finance officer perspective as typically most businesses have multiple billing, accounts payable and ERP systems relating to different trading partner categories and lines of business, and many of these process invoice data on PDF or paper invoices in manual or semi-automated ways,” says Van Der Valk.

Many of these systems cannot be easily upgraded to handle the quality requirements and data completeness of an e-invoicing regime. Therefore, businesses may need to upgrade systems, develop new workflows and ensure compliance with reporting requirements.

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