The Future of VAT

At the center of Western Europe’s state funded health care system, public infrastructure, and state support is VAT. The tax helps the various state governments pay for the myriad of services they offer to their citizens and residents. It’s a critical building block that helps maintain the social structure in place, and while many levies are being attacked by those who wish to remove additional taxation, VAT tax is protected and stands tall as the choice of tax by European governments.

The European Commission envisions EU states working together to prevent fraud. They point to the €150 billion Vat Gap between the amount due and the amount collected, and believe that only through harmonization can member states close that gap. However, member states want to protect their independent tax sovereignty, and aren’t interested in consolidating the system.

With the European Commission at odds with member states, it has people wondering what the future of VAT looks like in Europe.

VAT Legislation and Digitization

There are two primary areas to look at when talking about the future of VAT. Legislative changes have already started taking place, while digitization is the terms bandied around when discussing ways to modernize the system. Each will play a key role in shaping the way VAT looks and functions in the future.

Legislative Changes

Legislative changes are the easiest to see. While the system has been changing since 2015, we saw some serious changes go live in January 2020. The 4 Quick Fixes simplified call off stock rules and chain transaction rules. It also increased the use of VAT numbers, requiring suppliers to obtain a customer’s VAT number and verify it’s in the EU’s system, and introduced legislation detailing the evidence that is needed to prove that goods have moved from one country within the EU to another.

Those changes are just a precursor to January 2021, when B2C Mini One Stop Shops (MOSS) are introduced. This is expected to simplify the submission requirements of businesses, by reducing the requirement that businesses have multiple VAT registrations for different countries to just one single VAT return and payment to a single tax authority.

January 2022 will introduce another round of changes to the VAT system, as it moves from MOSS to B2B One Stop Shop (OSS). Again, designed to simplify reporting rules, suppliers charge VAT at the rate of the recipient’s country, and then submits VAT using a single VAT return and payment.

It’s still not really known how Brexit will impact VAT on the legislative side, which could complicate things for anyone doing business with United Kingdom-based countries.

The Move to Digital

VAT digitalization is a catchphrase frequently used to describe the future of VAT. For many, that will mean electronic submissions and payments, but digitalization goes beyond using digital tools to transfer funds and file paperwork.

Real time reporting, which is expected to lead to data transparency, improved compliance, and reduced burdens on the taxpayer, is a key digital initiative. It has already seen adoption in Hungary, and is likely to see further growth across the EU.

E-invoicing, which has been widely adopted following a 2014 EU Directive for B2G invoicing, is also growing. Italy requires e-invoicing for B2B and B2C transactions. For these transactions, the invoice is first submitted to the tax authority for verification, before it goes to the recipient.

What is the Future of VAT?

With the legislative and digital changes that are either already here or on the horizon, it’s clear that the processes involved in VAT are evolving. Businesses can expect new regulations, processes, and frustrations, as governments try to find their way in a world that’s constantly changing.