ViDA: Everything you should know about VAT in the Digital Age

The European Commission announced their initiative called VAT in the Digital Age, or ViDA, in December 2022.

This initiative outlines a new set of regulations to update the current VAT system. First and foremost, it aims to address the VAT gap. The latest VAT Gap report* showed that EU member states lost a total of 61 billion Euros in VAT revenues in 2021 alone.

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Before we get into the details about ViDA, here’s a quick overview of VAT gaps. A VAT gap is the discrepancy between expected VAT revenue and what was collected. It is a pressing issue for tax authorities to manage, refer to the significant losses within the EU, mentioned above. Therefore, tax reporting mandates with requirements for Continuous Transaction Controls (CTCs) are a key tool in lowering the VAT gap. The European Commission outlines several causes of the VAT gap, including:

• Fraud and evasion
• Corporate bankruptcy
• Maladministration
• Legal tax optimisation
• Corporate insolvency

This blog delves into what VAT in the Digital Age is, what it entails, which businesses it applies to, and when these changes come into effect.

What is VAT in the Digital Age?

As briefly summarised in the intro, the European Commission announced the new ViDA regulations in 2022.

This initiative will adapt the existing VAT system so it is more readily applicable to online businesses. Currently, the VAT system that is in place was originally intended to apply to traditional brick-and-mortar businesses (think high-street retailers). Understandably, as times have changed, with increasing consumer demand for online retail, this VAT system is no longer fit for purpose. However, with ViDA in place, tax authorities can accurately and efficiently collect VAT from any business selling goods or services online to customers in the EU.

The existing VAT system is vulnerable to fraud, as CTCs are not mandatory. Therefore, intra-EU trade transactions are usually inspected months after their occurrence, which is too slow to monitor tax evasion. This is where VAT in the Digital Age comes in.

The ViDA initiative is based on three guiding principles:

1. A new real-time reporting system, based on eInvoicing

The new system will impose real-time reporting requirements to counteract VAT fraud. As a result, the European Commission estimates** an 11 billion euro reduction in VAT fraud annually. In addition, it will cut down 4.1 billion euros annually in administrative and compliance costs for EU traders.

2. Updated VAT rules that more readily apply to the platform economy

ViDA also introduces updates to VAT rules for platform economy operators within the passenger transport and short-term accommodation sectors. This will ensure consistency for all EU member states and simplify the compliance requirements for SMEs.

3. A single VAT registration for businesses selling to EU consumers

The proposed regulations build on the existing VAT reporting model for e-commerce. Basically, it means businesses selling to consumers across multiple EU member states will only need to register once to fulfil their VAT obligations for the entire EU.

Standardising invoicing in Europe

Although, ViDA is not the first initiative in standardising invoicing and tax reporting in Europe. The European eInvoicing Service Providers Association (EESPA) has also been at the forefront of defining the future of eInvoicing in Europe.

As a member of EESPA, Transalis has been actively involved in defining best practices and influencing public policy decisions around eInvoicing and interoperable ecosystems.

Moreover, the EURINV19 project conducted in 2020 aimed to achieve an interoperable eInvoicing standard for public procurement. Transalis was the only UK solutions provider in this consortium. As a result, we are now fully compliant with the European Standard on eInvoice for cross-border transactions.

What does ViDA mean for businesses?

VAT in the Digital Age applies to the sales of goods and services to customers in the EU.

This means that both businesses based in, or outside, the EU are affected. Therefore, if your business sells goods and/or services to customers in the EU, then you will need to comply with ViDA regulations.

The ViDA regulations stipulate the inclusion of additional information on invoice documents, including:

• VAT identification numbers (supplier and customer)
• The place of supply
• The VAT rate

The ViDA initiative also includes Digital Reporting Requirements (DRR). The DRR aims to provide a standardised real-time tax reporting framework (similar to CTCs) across the EU. These requirements will impact existing CTC models in countries with eInvoice mandates, as each member state must ensure that their regulations comply with the ViDA initiative.

When does ViDA come into effect?

The initial phase of ViDA was proposed to come into effect from the start of 2024. However, this has been delayed.

Currently, EU Finance Ministers are due to meet in May 2024 and are expected to agree on the implementation approach and schedule. The new deadlines for the phased delivery of ViDA are now likely to be between 2026 and 2030.

How can your business become compliant?

Keeping up to date with the rapidly evolving VAT and eInvoice reporting requirements is a real challenge for businesses today.

As tax authorities increasingly announce new mandates, all with varying degrees of complexity, it is difficult to determine which rules apply. We advise onboarding with an experienced solutions provider, such as Transalis, to support the technical delivery of such requirements. As previously mentioned, we have been involved in EU initiatives in standardising eInvoice requirements and have supported several clients with their reporting mandates across EU member states.