How E-Invoicing Is Changing The VAT Gap Game

Alex Baulf, Senior Director of Indirect Tax at Avalara explains how e-invoicing is switching up the VAT gap game.

This latest difference recorded for 2019, equating to a total VAT revenue loss of 10.3% across the EU, is known as the VAT gap. A major concern for governments across the continent, it is typically caused by a combination of fraud and tax evasion, corporate insolvency, corporate bankruptcy, maladministration and legal tax optimisation, among other activities. But it is not a case of total doom and gloom. Indeed, a key headline from the latest VAT Gap Report is that the gap has been reducing between 2015 and 2019. Yet there is no avoiding the fact that €134 billion is still a mammoth loss.

To put it into real-world terms, such a sum could be used to pay for 250 state-of-the-art hospitals or 2,500 kilometres of high-speed railway. The VAT gap is still a major concern, particularly in view of the huge investment needs EU member states must address in the coming years.

Mandatory e-invoicing

So, how can the VAT gap be tackled effectively? There is a strong case to be made for mandatory e-invoicing (also known as electronic invoicing) - not just within the EU but worldwide. As its name would suggest, e-invoicing entails the exchange of an invoice document between supplier and buyer in an integrated electronic format.

It is essentially a more watertight way of enforcing tax laws and maximising VAT collection activities compared to traditional methods of ensuring VAT compliance that typically rely on the periodic reporting of aggregated summary data and rare tax audits.

Leveraging technology and standardised datasets instead allow governments to benefit from streamlined, accurate reporting and a reliable audit trail that can be used to identify fraudulent transactions with ease. In this sense, it is a modernised, drastically enhanced way of improving the transparency of VAT payments and recovery.

The legislation landscape

It should come as little surprise, therefore, that many European countries have already established, or are in the process of establishing, legislation that governs the use of e-invoicing and promotes its use due to unlocking such benefits.

Italy and Hungary stand as prime examples, both having successfully introduced compulsory e-invoicing already. Meanwhile, many other European nations including Germany, France and Poland have outlined their intention to instate mandatory e-invoicing in the coming years.

Interestingly, the European Commission itself is considering the creation of a harmonised framework for standardised e-invoicing that will ensure transparency across EU borders, as well as exploring the possibility of a gradual introduction of obligatory e-invoicing across its member states come 2023.

Such commitments are not limited to EU efforts either. Equally, looking beyond the continent, Saudi Arabia began its rollout of e-invoicing mandate in December 2021, set to be followed by Egypt in January 2022 and Vietnam in July 2022. The business case for companies

Governments aren’t the only party that stands to benefit from mandatory e-invoicing.

Indeed, the benefits for them are clear, yet there is a strong business case to be made for organisations adopting such modernised mechanisms as well. Indeed, there are a variety of benefits that can be realised by companies. Compared to physical processes, digital e-invoicing can be handled and archived in a streamlined manner, saving not only time but equally costs relating to printing and postage. Further, compared to PDF invoicing, e-invoicing could save companies as much as 70% in processing costs.

There’s also a reduced risk of human error, removing the need for manual data entry that is typically required for PDF or paper invoices. This not only prevents administrative issues that are a significant contributor to the current VAT gap, but will save potentially awkward conversations and improve business relations.

As a third example, e-invoicing can additionally improve security thanks to the integration of encryption technology, digital signatures and secure networks, making it not only the fastest but equally the safest way to send and receive invoices.

Embracing the transition

With many countries in the process of adopting mandatory e-invoicing legislation – if not already adopted - it is clear that this form of invoicing could become the norm globally as an effective tool in tackling the VAT gap.

It is therefore imperative that organisations start thinking about making the transition proactively in order to be well prepared for regulatory changes around the corner. Further, businesses trading across territories will need to think strategically and seek to implement an e-invoicing solution that is scalable across countries and regions, as opposed to purchasing multiple individual local solutions as and when new mandates appear.

In the same way that organisations are continuing to increasingly harness technologies to digitise their operations, e-invoicing can provide a stream of benefits to both company and country alike. Early and willing adopters will not only help reduce the tax gap, but will also experience more streamlined tax and business processes, and greater business agility to meet changing requirements as the e-invoicing trend continues to spread in the future.