The European Commission has released draft legislation setting out its ‘VAT in the Digital Age’ programme to further modernise VAT within the EU.
The planned changes will affect a wide variety of VAT registered organisations. The EU intends to implement them in two waves, with cross border trading changes taking effect in 2025, and new digital invoicing and reporting coming into force in 2028.
The planned reforms are extensive, but at this stage the headlines appear to be as follows:
From 1 January 2025:
- Online platforms facilitating supplies of short-term accommodation rental or passenger transport will be liable to account for VAT on bookings where the underlying provider of the service is not a VAT registered business in its own right.
- Current call-off stock arrangements, covering a foreign supplier’s goods held in stock in an EU country to meet local demand, will be replaced by a new One Stop Shop scheme for transfers of own goods. This will allow companies to report such shipments within the EU in one return, which should reduce the requirement for businesses to register for VAT in more than one country in the EU.
- The Import One Stop Shop scheme, which allows online reporting and payment of import VAT on low value goods from suppliers from outside the EU will be made mandatory for online marketplaces who are responsible for accounting for VAT on such sales.
From 1 January 2028:
- Electronic invoicing will become the default method for issuing invoices and the list of information that must be included on a VAT invoice will be expanded to include bank details and the date and amount of each payment due for the supply.
- A new two-day deadline will be introduced for issuing invoices and reporting intra community supplies of goods and services that are subject to a reverse charge. Suppliers must issue the invoice and electronically report the transaction to the tax authority within two days of the supply. This is a significant tightening of the current rules which allow up to 45 days to issue an invoice and may signal the death knell of the periodic VAT return which currently allows transactions to be reported often months in arrears.
- The EU plans to monitor the impact of this cross-border transaction-by-transaction reporting system for five years after its introduction, with a view to eventually creating a similar system for domestic sales which would harmonise digital reporting of VAT for all member states. At present, many EU countries are operating their own individual real time reporting and digital filing systems, which creates a major compliance challenge for businesses trading in more than one member state.
The legislation has yet to be formally ratified, but our current understanding is that the reforms have been agreed in principle by all EU member states and are expecting to come into force broadly as they are currently written.
The changes are largely focused on the VAT treatment of supplies of goods and services within the EU so, although they will affect UK businesses which trade within the EU, they will not make direct changes to the UK’s VAT system. Nevertheless, the EU’s plans are likely to be influential here in some ways. Despite Brexit, the UK government will not want to diverge too far from the EU’s rules on cross-border trade in case it causes more difficulties for those selling between the UK and the EU. Also, since introducing Making Tax Digital (MTD) for VAT, HMRC has been keen to look for new ways to make use of its direct connection to taxpayers’ VAT data and may be considering a real time VAT reporting system of its own. Given the relatively short timescale given to UK businesses by HMRC to prepare for MTD, this may even happen before the EU’s proposed start date of 2028.