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Electronic VAT reporting in Europe: implementation and evolution

European countries lose 825bn euros from tax evasion every year. This represents a loss of 16.5% of their tax take, according to a report by the socialists and democrats group. This is a major problem for governments and for which action has already been taken at both global and local levels.

EU member states have a legal framework on VAT, but its application varies from country to country. Electronic VAT reporting is a standardised method already in use in many territories. The adoption of this digital system is the normal evolution of a mandatory process for all taxpayers. It aims to facilitate and speed up payment, as well as prevent fraud and evasion.

Countries leading the way in electronic VAT reporting

The adoption of electronic VAT reporting has often been driven by high rates of fraud. This was the case for the Czech Republic, which had a tax gap of 22bn euros in 2014. Since then, electronic VAT reporting was made compulsory for companies and optional for individuals. As the implementation of this measure progressed it reached more companies and businesses - including automatic tax-reporting machines. Within two years, the VAT Gap decreased by 3%.

Portugal was another of Europe's pioneers, where mandatory B2B e-invoicing and electronic VAT reporting came into force in April 2014. Although the tax gap has narrowed progressively since then, the country still loses 2bn euros through tax evasion. The Portuguese government has taken steps to push forward the scope of the standard. These include making it compulsory for more and more companies. To this end, any company invoicing more than €75,000 VAT have been required to file returns electronically since 2019, and this threshold will drop to €50,000 in 2020.

Portugal was followed by Poland, which since 2016 has required large companies to file their VAT records electronically. The government has gone a step further making it mandatory since 2018 for all companies to do so using SAF-T JPK_VAT files. Legislation is being changed and a new single form has been created (JPK_VAT). To make the transition easier, all taxpayers have until July to start using it.

With 60bn euros a year lost to tax fraud in Spain, in 2017 the government implemented its SII invoice-reporting system, which is mandatory for all taxpayers with turnover above 6m euros, companies registered under the country's monthly VAT payment system (REDEME), whilst being optional for other companies. Previously, it took Spain's tax authority 30 to 90 days to be informed of companies' VAT, but this has now been reduced to just three days. The regulation continues to be extended to other sectors as it transitions to a full electronic tax-reporting system. In just one year (2017-2018), VAT collection from large enterprises grew by 3.4bn euros.

2020: drive for use of electronic VAT returns

Hungary implemented a similar measure in 2018. Since then, it has continued to make improvements and in April 2020 the Hungarian tax authority (NAV) will make it mandatory for all companies with VAT receipts of more than 100,000 HUF to use the new version 2.0 of the XML for e-invoices.

In the UK, a legal framework for electronic VAT reporting was established in 2017, with companies being given a grace period of two years to complete implementation. However, more time has been given for the transition for new businesses. This means the electronic VAT return system is not yet fully implemented, although it is planned to be in 2020. The UK uses its own model, Making Tax Digital (MTD), and requires companies with VAT receipts of over £85,000 (about €99,200) to submit their tax returns in digital format and file them electronically to the HM Revenue and Customs.

Italy's VAT gap is the highest in Europe and the government has taken steps to address this. Although it became mandatory in 2014 to use e-invoicing for B2G transactions, it was not until July 2019 that it became mandatory for taxpayers with VAT receipts exceeding €400,000 to use the monthly electronic reporting system. This measure is being extended in January 2020 to all taxpayers.

In other European countries the future of electronic VAT reporting is less clear. In Germany, for example, there is no specific regulation on this matter. Other countries with exorbitant VAT gaps - such as Romania (35,8%)  and Greece (29,2%) - have measures planned to improve collection.

As we can see, there is still a long way to go. The implementation of mandatory e-invoicing for B2G transactions is a key measure in reducing fraud. However, its medium- to long-term impact has yet to be studied. The same applies to electronic VAT reporting, which is expected to reduce the tax gap year-on-year and benefit businesses in terms of costs and efficiency.