Rethinking e-invoicing: A new model for VAT calculation and payment

Indirect tax systems around the world continue to face challenges with fraud, reconciliation issues, and inefficient compliance processes. And with the rise of e-invoicingElectronic invoicing - widely referred to as e-invoicing - is the exchange of a digital document between a supplier and a buyer. E-invoices are issued, transmitted and received in a structured data format that enabled automatic and electronic processing. They contain data in a machine-readable format so that an AP system can read an invoice without manual data entry, leading to faster and more efficient invoicing. and digital reporting, requirements are constantly evolving, forcing the taxpayer to do more to ensure they are accurate and compliant.

However, I have been disappointed by the approach of many tax authorities when it comes to e-invoicing, as rather than using the opportunity to innovate and revolutionise the way transactions and tax are interfaced to create a platform that helps the taxpayer, the most basic e-invoice approach is often taken; adding extra work for the taxpayer.

So where could we be taking the e-invoice revolution? Is there an opportunity to completely reimagine how VAT (or GSTGoods and Services Tax) is calculated, charged, and paid? In this article, I am going to explore the concepts of calculating VAT but at the same time not calculating VAT… confused? let me explain.

The concept is where the supplier still determines the correct tax code, such as DE VAT STD 19% for a B2B or B2GCommerce between business to government. sale into Germany, but does not charge or collect the tax on their invoice. Instead, the entire VAT process shifts in a way that benefits tax authorities, suppliers, and customers alike.

The core concept: Tax code without tax charge

In this model:

• The supplier issues an invoice for €200, listing two line items of €100 each.
• Each line is assigned a tax code (for example, DE VAT STD 19%) just as it is today but the difference is the tax percentage charged is just 0%.
• No tax amount is charged on the invoice itself. The total invoice value stays at €200.

When the e-invoice is submitted to the tax authority’s platform, the DE VAT STD 19% code used in the supplier system is mapped to the tax authority’s tax code for domestic standard rated VAT. The tax authority system validates the invoice submitted, just as e-invoice systems do now, checking the tax treatment based on the tax codes used, supplier and customer details, and other compliance data. The tax authority then:

• Calculates the VAT due which would be on a line by line basis so each line, using the mapped tax code, would determine €19 each making an invoice total of €38 (19% of €200).
• The supplier invoice is now available to download from the tax authority portal including the added VAT and can be downloaded:
  • as the total amount including the VAT (€238) or
  • as just the net amount (€200).

How the customer pays

This creates two straightforward payment flows:

• The customer pays the supplier €200, covering only the net invoice amount.
• The customer pays the tax authority €38, covering the VAT directly. The actual payment can be delayed until the VAT return and then the balance of the total VAT due less the total VAT that is recoverable, just like it is done now.

Alternatively, the customer could make a single payment of €238 to the tax authority, where the tax authority then splits the payment:

• Transfers €200 to the supplier’s bank account using the invoice reference.
• Retains €38 as the VAT amount.

Whilst both approaches work, the tax authority taking full responsibility as a centralised payment system is unlikely.

Fighting VAT fraud and strengthening the audit trail

As this approach takes all VAT determination and payment away from suppliers or customers, centralising it solely with the tax authority, it can provide huge benefits to VAT fraud prevention.

• It eliminates common VAT fraud schemes. A supplier that isn’t actually registered for VAT cannot fraudulently collect VAT, because:
  1. Only real VAT numbers can be used as the tax authority will validate to ensure the supplier and the VAT number match
  2. Even if both the name and VAT number used were valid, all VAT is paid directly to the tax authority.
• It creates a perfect audit trail. When the customer later reclaims VAT, they match the VAT paid directly to the tax authority against the supplier invoice held in the tax authority’s system, much in the same way that India does with GST. Verification and recovery of VAT becomes simple and highly reliable.
• It allows disputed invoices to be managed cleanly. If there’s a dispute, the tax authority can hold the VAT payment until the underlying invoice issue is resolved.
• There is no need for deferred VAT options as by default, this system means that all VAT is deferred and no VAT can be recovered until it has been paid, even if the supplier has been paid.
• If it is just the tax code that is at fault, the tax authority could even adjust it for you allowing you to update the VAT in your own system without the need to credit and re-issue the invoice.
• The integration into the customs eco system will ensure a better link between the content entered on the actual invoice and that on the customs forms.

Simplifying accounts payable with direct imports

Under this approach, the tax authority could become a central hub for all transactional invoices and would allow:

• A single point for customers to download ALL supplier invoices, both domestic and foreign, directly from the tax authority portal thus eliminating the need for invoice entry.
• Better tax determination as the majority of transactions can just use the tax code provided by the tax authority on the download to ensure the correct tax treatment.
• Customers could insist that their policy is that all invoices have to be entered into the tax authority portal meaning foreign suppliers would need the ability to register. This approach would help with stopping the practice of deliberately undervaluing the amounts on customs forms to reduce the amount of import taxes because any imported product can be linked with the amount already added to the tax authority. We could go a step further to incorporate the importation documentation as part of the foreign invoice entry solution.
• These invoices would come pre-validated, with tax already determined.
• A single import into the AP system could dramatically reduce manual entry, errors, and duplicate checks.
• The supplier does not need to worry about adjusting their sales system to account for the missing VAT having sent the gross invoice that includes VAT to the tax customer only to receive the net amount from the customer as they paid the tax authority the balance, i.e. the split payment concept.
• Better cashflow for both customer and supplier as neither needs to worry about the increased revenue related to VAT and then subsequent cashflow risk for when the VAT bill has to be paid.

Tax authorities could even require all suppliers, including foreign ones, to submit invoices through this portal. That would mean companies have just one clean source of AP invoices to load, streamlining processes and reducing compliance risk.

Adding blockchain for trust and transparency

This approach also forms the basis for a perfect blockchain use case where private blockchain networks between the supplier, tax authority and customer are formed with each phase of the transactions being added to the blockchain allowing each party to know exactly the status of the transaction.

Logistics and banking can also be added to the blockchain to allow the tracking of goods as to when shipped/delivered or paid/money received, confirming that products have indeed been shipped, received and paid for thus confirming any tax date or confirmation used for freight incoterms.

Each stage would be recorded on the blockchain. For example:

• Invoice issuance
• Tax authority approval
• Receipt of invoice by the customer
• Confirmation of shipment
• Confirmation of import duties paid
• Confirmation of receipt of goods delivered
• Payment by the customer
• Payment received by the supplier
• Split payment of VAT recorded by the tax authority
• Payment of split payment VAT amount by tax authority

This would ensure all parties see exactly where each invoice stands, support secure payment triggers by banks, and virtually eliminate disputes over payments.

The path forwards

This model reimagines the VAT process without removing the supplier’s responsibility for correctly determining tax codes. It offers:

• Stronger fraud prevention
• Simplified split payments
• Better compliance and audit readiness
• Automated reconciliation
• A single platform for managing invoices and payments

VAT returns will still be required because the recoverability of the VAT still needs to be determined with the reverse chargeWhen the Reverse Charge (mechanism) is in effect, the recipient of goods or services assumes responsibility for reporting both the purchase and the supplier’s sale in their VAT return. mechanism or self-assessed approach as currently used for zero-rated intra-EU purchases where the customer is responsible for the VAT determination and can still adjust the recoverable amount. The difference here is that the AP solution can use the tax code that comes from the tax authority as the AP transaction is downloaded and interfaced. This means the determination of the tax now really only is required for recoverability, which for the vast number of transactions is 100%.

With e-invoicing and digital reporting expanding rapidly, and with the emergence of secure blockchain networks and real-time payments, this could be the natural next evolution and maybe the next step after this would be for the tax authority to determine the tax for you.