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It’s a VAT Gap And You’ve Been Caught!

…without a solution for it.

For something that makes life easier and more efficient, the world of eInvoicing can sometimes seem complex and daunting. And for a company trying to do the right thing, it can be hard to keep up. As the conversation around einvoicing moves from "if" to "when," organisations can find themselves caught in a quandary over what’s best for them, leading to business-damaging procrastination over decisions, or worse – not making one at all.
But with eInvoicing mandates spreading across Europe and globally, it’s a decision that business can’t afford to delay. While a mandate is unlikely to be enforced in the UK any time soon, it will be by many of our trading partners.

Tax and Tax Fraud
So, what’s that’s got to do with VAT? Well, not too long ago, all business operated in a manual, paper-based environment, where the only option for tax owed against invoices was to collect it retrospectively. Which was very exciting for those intent on defrauding the system. And it seems that there were and are, a lot of them.

But with the advance of digitisation and the ability to speed the process up and operate in a traceable way, governments around the world are keen to use eInvoicing to their advantage and close the tax collection loophole. And you can see why. In a typically advanced country, indirect tax (such as VAT, or Sales Tax in the US) amounts to around a third of the total tax revenue collected by governments. And in Europe the VAT gap is estimated to be about 140bn Euros every year. EInvoicing was seen as a useful tool to enforce better process and compliance. Increasingly, this has meant mandating its use, particularly in the B2G environment. To do this, countries have adopted continuous transaction controls (CTCs).

What is a CTC?
A CTC is a control whereby regulators, governments and other tax collection authorities can tap directly into the transaction processes between businesses to see when tax is due, who owes it and how much. And as the name would suggest, it’s “continuous” enabling law enforcement agencies, like tax authorities to see transactional business data in real or near real time, rather than wait for businesses to report their indirect tax liability afterwards.

Is There Just One Type of CTC Model?
No, but then flexibility can sometimes be useful, there are:

  • Clearance - businesses authorise transactions with the government before forwarding to the client
  • Reporting – business create the transaction then clear the invoice with the government
  • Centralised - Since the release of the EU Procurement Directive obliging public entities to accept e-invoices, many European countries have implemented new requirements.
  • RTIR – Supplier must report a subset of the invoice in a mandatory format to their tax authority in real time after sending it to the buyer.
  • The Anything Goes Model – All the above are accepted. Currently, the French route

When do CTCs Come into Force?
Some are already in place in countries such as Brazil, Mexico and Chile, while in Europe Italy has led the way, being the first country to adopt B2B mandatory eInvoicing in a phased approach starting back in 2014. France is soon to follow suit in July 2024, while Germany have just announced their timeline for 2025. Poland, Greece, Spain, Hungary, Turkey, and Bulgaria are also at various stages of CTC adoption.

What’s interesting is that each country has decided to adopt its own system with different technical standards. Not surprising perhaps, when you consider that each country has different drivers and perhaps don’t want to centralise what they may see as sensitive information. Providing tax enforcement support is not the only purpose of CTCs, they also generate vast amounts of economic data, useful for helping to guide policy, but could also provide insight into areas that a country might rather keep quiet about. Understandable, but that does make for an environment that is more complex than it needs to be. Within Europe, it’ll be interesting to see how the existing PEPPOL framework and can create some harmony. Many of the industry solution providers have been proactive in helping to guide clients through the maze, notably Pagero, Tungsten, Ivalua and Sovos.

In the UK, the relatively low levels of VAT fraud have meant that the drivers have not been the same. Couple that with a cultural disinclination towards government control over business transactions and it means that CTCs are unlikely to come into force here in the short term. However, Making Tax Digital and the EU’s VAT in the Digital Age reforms mean that organisations can’t afford to be complacent. And if you are trading outside of the UK, it’s increasingly likely that you’ll come across CTCs. While the timeframes across the globe may differ, fundamental change is heading our way, don't get caught without a solution for it!

Article by Editor: Ellen Leith

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Avalara helps businesses of all sizes get tax compliance right. In partnership with leading ERP, accounting, eCommerce and other financial management system providers, Avalara delivers cloudbased compliance solutions for various transactional taxes, including sales and use, VAT, GST, excise, communications, lodging, and other indirect tax types. Headquartered in Seattle, Avalara has offices across the U.S. and around the world in Canada, the U.K., Belgium, Brazil, and India.