Real-Time VAT Reporting – It’s Not Near, It’s Here

As outlined in previous editions of Indirect Tax Matters, there is an increasing global trend of taxation authorities seeking to collect information from businesses’ enterprise resource planning (‘ERP’) solutions and other internal core systems in real-time by electronic means.

A number of European jurisdictions, such as the UK, Spain, Italy, Hungary and Poland, have already introduced digital regimes which affect VAT reporting. The move towards digitalised and streamlined VAT reporting systems is not confined to Europe, with countries such as Brazil, China and Argentina having already taken action.

There is a fundamental shift in how data is being collected and exchanged – we are moving away from information being ‘pushed’ to taxation authorities towards a position where it is being ‘pulled’ by them. While the nature and extent of the approaches vary between countries, similar themes and concepts are apparent. For ease of comparison between jurisdictions’ regimes, we often categorise them into three groups; real-time reporting (‘RTR’), electronic invoicing, and Standard Audit File for Tax (‘SAF-T’).

1.       Standard Audit File for Tax (‘SAF-T’)

SAF-T is a mechanism which was developed by the Organisation for Economic Co-operation and Development (‘OECD’). It is a format which enables the transfer of data from organisations to tax authorities in an electronic format. SAF-T is designed to enable tax authorities to conduct more efficient and effective tax inspections.

Despite what is implied by its name, jurisdictions which have implemented SAF-T have done so in a non-standardised manner i.e. there is no international standard list of data elements for SAF-T being adhered to. As a result, tax authorities in various jurisdictions have adopted their own versions of SAF-T. Non-OECD countries have also introduced approaches that are similar to SAF-T.

2.       Real-time reporting (‘RTR’)

We use this grouping where there is an exchange of data and / or visibility of information by tax authorities in either real-time or close to real-time.

3.       Electronic invoicing

Firstly, in relation to this grouping, it is important to distinguish between the ‘normal’ VAT rules governing the issuance of VAT invoices in electronic format, as permitted under Council Directive 2006/112/EC, and what we mean by an electronic invoicing regime in the context of this article. With the latter, while the approach differs between countries which have adopted this type of regime, taxpayers are normally required to submit transaction details and / or invoices either in real-time or soon after the event. In some jurisdictions, businesses cannot complete a transaction with a customer until a document number has been received in real-time from the tax authorities.

We would see this type of system as constituting a form of real-time reporting. Accordingly, for any country that has implemented an electronic invoicing system, we normally regard the jurisdiction as having adopted RTR too.

Now turning to a brief overview of some jurisdictions’ regimes.

UK

The UK’s Making Tax Digital for VAT (‘MTDfV’) regime is effective for VAT periods starting on or after 1 April 2019, for most UK VAT registered businesses.

MTDfV represents a significant change to the UK VAT compliance process. In its first wave, it sees an end to businesses being able to complete returns ‘online’. Businesses will be required to ‘push’ the nine figures of their UK VAT returns from their ERP system (or spreadsheet) to HMRC systems via an application programming interface (‘API’).

Depending on the type and version / instance of the ERP system that a taxpayer is using, they will either need to use their ERP’s in-built MTDfV API functionality or use a piece of ‘bridging’ software (a third party’s software solution, such as our tool) in order to file UK VAT returns going forward.

More ‘complex’ businesses have been given an additional six months before they are mandated to comply with the MTDfV regime. These include: trusts, not for profit organisations, VAT divisions, VAT groups, certain public sector entities (government departments and NHS Trusts), local authorities, public corporations, traders based overseas, those required to make payments on account, and annual accounting scheme users.

There are three key digital components to MTDfV:

1. Digital submission

All VAT return submissions must be done digitally, as outlined above.

2. Digital records

Although this does not mean businesses will have to store each invoice and receipt digitally, the transaction data will need to be stored digitally. This includes an accounts payable and accounts receivable transactional listing, and a digital VAT account from which the UK VAT return is prepared.

3. Digital links

VAT returns must have digital links to digital records – spreadsheets can remain, but they will need ‘digital links’ to source systems. HMRC has announced a soft landing period 12 months, however digital links will be mandatory from April 2020. It is anticipated that many businesses will find this aspect of the regime challenging, and will need to make some level of investment to ensure compliance.

Spain

On 1 July 2017, Spain introduced a new VAT reporting system which is called immediate supply of information (‘SII’).

SII requires taxpayers within the scope of the regime to submit invoices to the Spanish tax authorities within four days after the issue or receipt of an invoice in order to maintain their VAT ledgers on the Spanish tax authorities’ online platform. The information should be coded in a specific XML format.

Czech Republic

An electronic invoicing regime is compulsory for cash or cheque sales for certain activities (such as retail sales). Card payments and bank transfers do not come within the regime. The process can broadly be summarised as follows:

1. Retail store sends details of the transaction (in XML format) to the authorities;

2. The authorities send back confirmation of receipt with a unique code (FIK - fiscal identification code);

3. Retail store then issues a receipt (including the FIK) to the customer;

4. Registration of the sale can be verified through the web application of the authorities.

Poland

A SAF-T style regime known as JPK is applies in Poland. It is based on SAF-T but there are significant differences between both files. In Poland, instead of one singular XML structure, the Polish JPK consists of seven different XML files which contain different data. One of the seven files is exclusively for VAT invoices.

United Arab Emirates

There is a prescribed format for submitting data to the tax authorities, for audits.

It is known as ‘FTA Audit File (‘FAF’)’, and is broadly similar to SAF-T. The system requires businesses which are chosen for an audit to submit documentation required to support the figures declared in their VAT return in a prescribed format (.csv).

Ireland’s current position

Modernising Ireland’s tax system is certainly on Irish Revenue’s agenda.

Businesses in Ireland will be aware of the Pay As You Earn (‘PAYE’) Modernisation real-time reporting system that has been operational for all employee payments being made from 1 January 2019 onwards. This represents the most significant reform of the PAYE system since its introduction in 1960.

While no formal announcements regarding what form a ‘modernised’ Irish VAT reporting regime would look like, Niall Cody, Chairperson of Irish Revenue, was recently publicly quoted as stating that a move towards real-time VAT reporting was inevitable.

We are maintaining our long-held view that Ireland’s VAT reporting process will be overhauled within the next few years.

What should organisations be doing now?

In relation to MTDfV, those affected should immediately ascertain whether their existing ERP system(s) is capable of submitting UK VAT returns digitally. Based on our experience, while many ERP providers have created MTDfV solutions, they are often only available on the latest versions / instances of their software. That being the case, a costly and potentially time-consuming ERP upgrade may be required before a taxpayer is in a position to meet their statutory filing obligations via their ERP system. For those taxpayers, filing UK VAT returns using ‘bridging’ software is normally preferred.

At Deloitte, we have developed a piece of ‘bridging’ software (approved by HMRC) which may be of interest to most UK VAT registered businesses as it is specifically designed to work with Excel-based VAT return workings. To see a demo of the solution, please click here.

Where a business outsources all or part of its VAT compliance process, they should confirm with their service provider whether they are ready to comply with the requirements of the MTDfV regime.

More generally, businesses should now also be looking at their full VAT compliance process, and in particular where the data for this comes from, which systems are used, and how this information is adjusted and consolidated.

This end-to-end flow of information should be digital and capable of being audited going forward. Some organisations may be doing this currently by downloading reports and files, but where this information is being manually entered into spreadsheets or tax compliance software, the impact of automating this process should be considered.

It is likely that a digital audit trail from the submission of information to the underlying accounting records may be required, and potentially the submission of the underlying documents. Large organisations running complex or multiple systems may require several years (or longer) to implement these changes in their financial systems.

Should you have any queries on this article’s contents or would like our assistance with dealing with any taxation issue, please feel free to contact us.