Beginning of the end of the traditional VAT Return

Tax authorities are moving inexorably to live invoice submissions. The traditional periodic VAT return is doomed. Countries around Europe are anxious to reduce VAT revenue gaps of up to €150 billion per year and are looking to move quickly to impose digital transaction reporting as a way to generate additional tax revenue.

The most developed digital reporting is live VAT invoice and approval submissions to the tax authority. Poland for example has already announced the scrapping of VAT returns in 2019, replaced by monthly, detailed VAT transaction submissions. This places additional requirements on businesses to upgrade their accounting systems.  By obtaining this additional data from businesses places tax authorities in a stronger position when they issue assessments or determinations to businesses that fail to submit returns or fail to submit accurate returns. It enables tax authorities to check and calculate VAT liabilities in real-time rather than waiting on company self-assessment returns.

Live invoice reporting and tax authority approval is already in place in Spain, Hungary and Italy, and coming soon to Greece and Portugal.

Tax authorities have made use of improvements in software and accounting automation and have imposed increasingly strong VAT invoice reporting requirements. The underlying momentum has been to move away from the self-assessed VAT return towards being able to verify live VAT calculations on each invoice.

The drivers behind this move to digitalisation are;

• The failure to reduce the estimated EU VAT Gap below €150 billion per annum. The tax gap estimates how much revenue is lost to errors, poor administration and fraud.  The estimated gap has remained largely unchanged in recent years, and states are anxious to cut this gap significantly;
• Governments are anxious to cut the costs of administering their tax regimes by adopting digital reporting. Tax authorities often wish to reduce staff numbers due to pressure to cut costs, and are providing the remaining employees with updated analytical tools to enable more efficient capture and analysis of tax data.
• There is the need to effectively share cross-border data with other tax authorities to track the movement of goods and services globally. This aim may require common data standards, which can be delivered by digitalisation.
• Tax authorities wish to improve tax payers experience via online data platforms.

Common types of digitisation used by tax authorities

For over 10 years, EU member states started moving towards the digital submission of transactions subject to VAT – including sales, purchases, fixed assets, stock movements and bank transactions. Initially, countries adopted the OECD’s standardised Standard Audit File for Tax (SAF-T) schema, but more recently countries have imposed varying standards based on XML or API live submissions on transactions.

The common EU digital VAT formats include.

• Control Statements; mandatory e-ledgers of sales and purchase invoices, with details of VAT calculations, submitted with the regular VAT return. Typically only for domestic sales and inside the EU they supplement the European Sales List (ESL).
• Standard Audit File for Tax (SAF-T) developed by the Organisation for Economic Co-operation and Development (OECD). SAF-T is a mandatory XML-based listing of sales, purchase, stock, fixed assets and bank transactions.
• Live invoice reporting; real-time feeds of sales invoices to the tax authorities, often with return e-approvals.

Progress of adoption of SAF-T

Developed by the OECD in 2005, SAF-T is an electronic scheme for the exchange of information between the tax authority and businesses. It was created as a standard to be used globally to ensure consistency  between countries to facilitate exchange of data. The file requirements use XML, although the EU does not specify the exact file format. There are generally five reporting structures available for adoption by countries.

1. General ledger and supporting journals
2. Accounts payable, including supplier data and invoices
3. Accounts Receivable, with customer data and invoices
4. Warehouse inventories, and master data
5. Fixed assets ledger

At the time of its launch, it was hoped that SAF-T would form the basis for a global reporting system but this has not happened.

So far only seven EU countries have adopted SAF-T. Most countries have varied from the rigid OECD structure to suit their own national needs. Most states currently only require submissions on an on-demand basis, typically in advance of an audit.  The XML basis of SAF-T has fallen out of favour as countries such as the UK have moved to other data exchange models. The EU has recently dropped a proposal to introduce an EU-wide SAF-T requirement due to differences between the countries on data requirements.

Country	Digital format	Comments
Austria	SAF-T	On specific request from tax authority
Czech Republic	Control statement	Compulsory with VAT return
France	SAF-T	On request from tax authority.  New rules announced for introduction between 2023 and 2025 where sellers will need approval before e-invoice sent to customer for B2B sales. Approved invoices to be used to complete a draft VAT return by the tax authority.
Greece	Live invoicing reporting	Compulsory for all invoices
Hungary	Real time invoice reporting	Real time invoice reporting compulsory for all invoices, whatever the value
Italy	SDI	Live invoice reporting compulsory for all businesses
Latvia	Control statement	Compulsory with VAT return
Lithuania	SAF-T	On request from tax authority
Luxembourg	SAF-T	On request from tax authority
Norway	SAF-T	Compulsory from 1/1/20 for businesses with annual turnover exceeding NOK 5 million
Poland	SAF-T	Compulsory with VAT return
Portugal	SAF-T	Compulsory with VAT return for residents with sales above €50,000 per year, but not overseas businesses until January 2021.  VAT invoices must be produced on approved software.
Romania	Form 394	Compulsory, list of all transactions
Slovakia	Control statement	Compulsory with VAT return
Spain	SII (Immediate Information Supply)	Compulsory for large businesses (turnover exceeding €6m per year). Live invoice reporting including sales and purchase ledger, intra-EU transactions.
UK	Making Tax Digital	MTD to become compulsory for all businesses from July 2021. 9 boxes of the VAT return only.  No transactional data required.