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VAT in the Digital Age: Why clean, complete master data will be key to complying with new legislation

A consultation period on the European Union’s (EU’s) proposed amendments to administrative cooperation on VAT collection opened last week as the bloc urgently seeks to reduce its VAT gap.

The VAT gap has been a major problem for EU countries for some time; the latest figures for 2020 show the 27 nations that make up the bloc lost a combined €93 billion in VAT revenue to due to fraud, inadequate collection systems, maladministration and a host of other economic factors.

The EU believes greater administrative cooperation between its members is key to reducing the VAT gap and ultimately reclaiming much of the revenue that is currently lost each year. Its proposed legislation, which it plans to adopt by the second quarter of 2024, would bring countries closer together and introduce new measures to combat fraud.

It is just one of many steps the EU is taking to protect VAT collection and promote greater accuracy and reliability among businesses in reporting and remitting the tax.

In December 2022, the European Commission published its VAT in the Digital Age (ViDA) proposals with further recommendations on how to improve VAT collection and reduce the VAT gap.

How will ViDA change the VAT gap?

VAT is one of the most crucial sources of revenue for many EU countries. Unfortunately, it’s also one of the most vulnerable to fraud and evasion.

Romania has the highest VAT gap with a staggering 35.7% of its VAT revenues going missing, while Malta (24.1%) and Italy (20.8%) also fare badly.

ViDA has been created with the aim of modernising VAT reporting obligations, placing a newfound emphasis on technology that reflects how modern businesses are already working and facilitating the exponential growth of e-invoicing across the globe.

The ViDA proposals are designed to close many of the loopholes currently open to fraudulent companies and individuals, while also driving a marked rise in transparency and accessibility of data to tax authorities. They include:

• A move to real-time digital reporting for businesses that operate cross-border in the EU
• Updated VAT rules for passenger transport and accommodation platforms
• The introduction of a single VAT registration across the EU

As we move towards the digitalisation of the entire data journey from source to submission, there will be no place to hide for companies that are deliberately withholding due VAT. Similarly, revenues lost through less sinister means, such as substandard reporting systems, will slowly be eradicated.

What does it mean for your business?

While the ViDA proposals have not yet been formally approved, they are expected to come into effect during a phased implementation between 2023 and 2028.

The key takeaway for businesses should be that if they are to comply with ViDA and its digital reporting requirements, they will almost certainly require significant investment in IT and specialist tax and finance systems.

At the very least, assuming they already have heavyweight systems in place with the power and precision required, it is likely they will need fine-tuning to meet the unprecedented demands of ViDA.

Why master data holds the key to mastering ViDA

While much of the focus of ViDA is trained on e-invoicing and the concept of a single EU-wide registration system, we’re urging finance professionals to take a step back and prioritise their data at source. After all, it’s these data that eventually power processes such as e-invoicing.

You can buy the most stylish new car on the market, but if you fill it with the wrong fuel it won’t run.

Similarly, without clean, complete and concise master data that is correctly formatted, it’s impossible for any business to extract reliable information from source systems that allows their expensively assembled tax and finance technology setup to accurately populate a range of critical documents including VAT returns and invoices.

That’s why we recommend the use of a master data cleansing tool in conjunction with an automated tax solution or third-party tax engine to ensure tax is correctly determined, applied and remitted in every single transaction.

Only then can you enjoy the peace of mind that comes from achieving a seamless journey from source data through to multi-jurisdiction tax determination and successfully filed VAT returns or e-invoices based on reliable data and the correct treatment at every stage.