Europe is set to digitalise its VAT payment system in a bid to improve revenue collection and reduce fraud. The move has been sparked by the high levels of VAT fraud across the continent, which led to the loss of €93bn ($113bn) in VAT revenues in 2020 alone. The European Commission has proposed the VAT in the Digital Age (ViDA) reforms to regulate and tighten tax digitisation across the EU, with the most immediate phase due to take effect in 2024. The changes will affect businesses operating in Europe, including those in the UK, which is no longer an EU member state.

ViDA Proposals Explained

The ViDA proposals aim to create a system that is more compatible with today’s way of doing business, which is increasingly digital. It seeks to make the current VAT system more resilient to fraud, pushing a unified digital approach. This means businesses operating across the region will be required to get organized to remain compliant with new regulations.

The proposals can be broken down into three main areas:

• Introduction of digital reporting – real-time and continuous transaction controls (CTCs) – across the EU with the most immediate phase due in 2024.

• VAT treatment of the platform economy, which will ensure online businesses (like Uber and Airbnb) are subject to the same VAT regulation as every other business in this field.

• Expansion of the scope of the single VAT registration zone or One-Stop-Shop (OSS) and make the reverse charge mandatory for non-resident suppliers.

Risks and Challenges

The digitalisation of VAT payment systems is not without its challenges, and there’s a risk of more mistakes as business owners get used to new regulations. They will need to learn and adopt new processes in a relatively short space of time and be aware of the potential pitfalls.

Failure to comply with the new regulations will result in financial penalties and possibly reputational damage. 

Businesses will need to prepare for both domestic and EU-wide mandates and be aware that any compliance irregularities are more likely to be picked up by authorities. The widespread nature of the new regulations may well mean that any leniency that may have been possible previously will disappear.

How can business owners avoid the risks?

It’s going to be essential that business owners keep up with the regulatory changes. They’ll need to ensure that their advisors are familiar with and able to support them with new EU-wide regulations.

The complicated nature of the proposals and how they will interplay with pre-existing e-invoicing requirements will need significant foresight and an awareness that regulatory changes might require a complete rethink of existing processes.

UK Exporters and ViDA

UK exporters will also need to comply with the new cross-border digital reporting regime.

On the one hand, UK exporters will benefit from some of the proposed changes, such as the extension of the single VAT registration zone (OSS) and the ‘reverse charge’, which will reduce the number of countries an exporting business would need to register in for VAT.

On the other hand, UK businesses will need to comply with the new cross-border digital reporting regime, which will add additional costs.

The Future of VAT in the EU

Its hoped that business owners will enjoy long-term benefits from these changes, which will outweigh the short-term pain.

Adopting new technology could solve any existing administrative issues, and allow the internal processes to be streamlined. The overall administrative cost saving for businesses is estimated at €51bn between 2023 and 2032.

Where can I find out more?

HMRC has guidance on the gov.uk website on the new EU VAT ViDA proposals and the implications for UK businesses.

This provides information on the proposals and how they affect UK businesses, including the changes to VAT reporting and compliance requirements. It also provides guidance on how UK businesses can prepare for the changes and be sure they’re compliant with the new regulations.

The European Commission has a ViDA information page on its own website too, which includes an overview of the VAT Reform proposals and the latest updates on its implementation.

As ever, if you have any other questions, please get in touch with us.