The government-driven Making Tax Digital initiative aims to make it easier for individuals and businesses to keep on top of their taxes. In part motivated by the UK’s huge VAT gap – an estimated €22bn (approx. £19m) is currently owed to HMRC – the scheme will also aim to bring the country’s tax administration into the 21st century, making it much more efficient and effective.
As of April, VAT-registered businesses with a taxable turnover above the VAT threshold are required to use the Making Tax Digital service to submit their VAT returns and keep records digitally.
The British Government is not the first to utilise digital technologies for tax reasons, however. All across the world, politicians have acted decisively to address burgeoning tax gaps and implement digital reform. In fact, some countries have taken this further than the UK’s current initiative and introduced a centrally managed clearance model, in which all invoices must be issued via a government official platform.
How long have clearance models been around?
Historically, many countries have operated a post audit model, allowing businesses and their suppliers to exchange invoices freely but requiring them to prove their accuracy for up to a decade later. As such, companies are required to keep an accessible archive as well as being subject to periodic reporting. In contrast, a clearance model requires each invoice to be reported and authorised electronically, before or during the exchange process. This allows governments to monitor tax in real time, with closer scrutiny helping to limit the loss of revenue arising from tax leakage.
Chile was an early adopter of the clearance model, introducing it in 2003. Since then, other countries such as Brazil and Mexico have overtaken Chile in terms of uptake, with Mexico leading the way and sending more than 10 billion e-invoices on an annual basis. In 2017, it came close to its objective of digitalising all processes relevant for taxation, consequently increasing tax collection by an impressive 34 per cent.
Europe begins to mandate e-invoicing
In Europe, change is also afoot, partly due to the e-Invoicing Directive 2014/55/EU which must be implemented by the 18th April this year. Five years ago, the European Commission voted to introduce a European e-invoicing standard for public procurement because there were so many different invoice formats in existence. These varied formats were causing unnecessary complexity, high costs for businesses and public entities and were a barrier to frictionless trade.
Once the Directive comes into force, all European authorities will have to accept electronic invoices that comply with the requirements laid out by the EU. However, the directive only sets out a rough framework for countries to follow and only applies to public sector invoices.
The Italian adventure
Italy, however, has taken this one step further by making e-invoicing mandatory for all companies, not just business-to-government (B2G) transactions. Since January this year, all invoices must be transmitted via the Italian government’s interchange system, Sistema di Interscambio (SDI), and issued in a specific format. This was again motivated by the size of the country’s VAT gap – in 2015, it was a staggering €35bn, the largest amongst all the EU Member States.
While it has only been a few months since the mandate kicked in, the early signs are promising and it’s likely that other European countries will follow suit.
Lack of harmonisation
The biggest issue is that there is no European-wide standard when it comes to digitising tax, meaning that any business trading internationally is faced with a labyrinth of rules and regulations to comply with. This is resulting in a huge amount of friction. In 2017, Tungsten Network conducted research into the causes of friction within global supply chains and discovered that businesses already spend an average of five hours a week sorting out compliance issues, including handling international taxes. The figure is probably higher now, especially for businesses not processing invoices on global networks. This will inevitably get more complex for UK and European businesses post Brexit.
With this in mind, companies that trade globally will need to ensure they stay on top of the changes and their invoices remain compliant. Without support, this can be an extremely time-consuming process and the rate of change can be overwhelming. There are, however, global, digital networks that can remove much of the headache. Instead of having to invest inordinate time and resource monitoring tax legislation worldwide, companies can have peace of mind knowing that someone else is checking and guaranteeing that all invoices are compliant.
Making Tax Digital is likely to be the first step in a much bigger journey. One day, the UK government may copy its Italian counterparts in mandating e-invoicing. If they do, businesses should be looking at it as an opportunity rather than a burden. E-invoicing increases the efficiency and accuracy of a company’s accounts payable team, eliminates error and fraud and reduces the cost of handling invoices by more than 50 per cent. Most of all, it removes friction from the supply chain and brings down barriers to global trade. All eyes will be on Westminster as it learns from the Italian adventure and potentially follows suit.
Ruud van Hilten, Senior Vice President at Tungsten Network