VAT compliance VAT compliance VAT compliance

Both the European Commission and Revenue are undertaking reviews to consider potential changes to how businesses report VAT and this may result in changes to current VAT compliance requirements in Ireland within the next few years. While the outcome of these reviews is still some way off, in this article, David Duffy, a Partner in KPMG’s Indirect Tax group, and John Curry, a Principal in KPMG Tax Transformation and Technology group, discuss VAT reporting models already operating in other jurisdictions and under review at a European Union (EU) level, which may offer some clues to future changes in Ireland. They also consider what businesses can do now to help ensure their VAT compliance processes are future proofed for any potential changes.

2022 marks the 50 year anniversary of the introduction of VAT in Ireland. While there have been many changes to the VAT system in that time, businesses have largely reported and paid VAT in the same way – filing a periodic (usually bi-monthly) summary return of VAT on their sales and purchases, supplemented by certain statistical returns mainly affecting intra-EU transactions. These returns and supporting books and records can then be selected by Revenue for review either shortly after filing (e.g. Aspect queries) or as part of a Revenue audit.

However, in recent years we have seen a trend of tax authorities in other jurisdictions introducing additional requirements in relation to how businesses record and report VAT. This has included requirements to maintain their supporting data in a particular format, or to provide this supporting data to the tax authorities at the time of or shortly after the transaction, or to require invoices to be issued electronically (in some cases with pre-clearance from the tax authority).

There are already multiple examples of these changes across the EU. However, as there is currently no agreed EU-wide approach, these digital reporting requirements vary in terms of the form and frequency of reporting, the type of taxpayers and transactions covered, the data set required as well as the means used to communicate the information to the tax authorities. The lack of consistency between reporting requirements creates significant compliance challenges and costs for businesses operating cross border or in multiple jurisdictions.

In Ireland, Revenue has not yet introduced new VAT reporting requirements but has commenced a review with a view to modernising VAT reporting. In addition, the European Commission is undertaking a study of VAT digital reporting requirements (DRR) and is aiming to announce EU-wide legislative proposals by the end of 2022 (which would then need the unanimous approval of Member States before taking effect). Therefore, we expect the VAT compliance regime in Ireland to change, most likely within the second half of this decade. While we cannot say, at this point, what these changes will be, businesses can begin to think ahead to ensure their current VAT processes meet best practice. In addition, businesses with VAT registrations in other jurisdictions may already be affected by changes and need to ensure their current processes are compliant.

Digital VAT reporting involves a business being required to maintain and/or submit VAT data to the tax authorities (over and above the summary data included in a standard VAT return) in a prescribed digital format. There has been speculation that these new forms of VAT reporting could lead to the death of the VAT return – that because more detailed data is provided to the tax authorities that a summary VAT return is no longer required. Alternatively, it could lead to a situation where the tax authority pre-fills the VAT return for review by the business. However, the experience to date is that these reports are supplemental to business’s VAT returns rather than replacing them.

At a high level, VAT digital reporting regimes can broadly be broken down between those which require periodic reporting of transactional data at regular intervals and those which use continuous transaction controls whereby transactional data is submitted to the authorities before, during, or shortly after the relevant transaction. As it stands, 12 of the 27 EU Member States have introduced some form of digital VAT reporting in addition to their normal VAT returns, 9 Member States require periodic reporting, while 3 have opted for continuous controls. We expect these numbers will continue to grow within the next few years.

Periodic reporting requirements generally require data to be provided using VAT Listings or standard audit file for tax (“SAF-T”). VAT Listings have traditionally been the most common approach adopted (for example in the Czech Republic, Estonia, Croatia, Latvia, Slovakia and Bulgaria). They are transactional level listings typically submitted together with VAT returns. Reportable transactions to include in VAT Listings vary based on the jurisdiction but they typically include both sales and purchases for domestic and cross-border business to business (B2B) and business to government (B2G) transactions.

Some EU Member States use a SAF-T system for periodic VAT reporting, such as Poland, Portugal and Lithuania. SAF-T is a specific type of report based on an OECD standard which can be tailored to national requirements. While SAF-T’s main features are similar to VAT Listings, the scope of transactions covered tends to be broader, and data relevant to other taxes is also collected. Certain other EU Member States, such as France and Luxembourg, only require information to be submitted in a SAF-T format upon request, for example in the event of an audit.

Continuous reporting involves businesses reporting data to the tax authorities on a near-time or real-time basis. Examples of these systems exist in Hungary and Spain. The Hungarian Real-Time Information Reporting (RTIR) system applies to all businesses which are VAT registered in Hungary. It requires the reporting of information via the tax authority’s portal on a transaction-by-transaction basis, within 24 hours of a transaction being invoiced. Spain’s immediate electronic reporting system requires that details of domestic and intra-EU transactions (sales and purchases) regardless of their value are provided to the tax authorities within 4 working days. It applies to all B2B, B2G and business to consumer (“B2C”) transactions.

Mandatory e-invoicing is another form of real-time reporting. It requires that invoices (or invoice information) are prepared in a particular machine readable format and are transmitted to tax authorities prior to a transaction taking place, at the time it takes place or shortly thereafter. Depending on the system in place, businesses may be able to send the e-invoice directly to their customers or they may require pre-clearance from the tax authority before doing so. Italy has had mandatory e-invoicing for certain domestic transactions since 2019 and will extend to this to certain cross-border transactions in July 2022. The French government has announced plans to introduce mandatory e-invoicing for established businesses in respect of domestic B2B and B2G transactions between 2023 – 2025 while Bulgaria, Croatia, Hungary, Poland, Spain and Slovakia have also flagged an intention to introduce it.

Making Tax Digital (MTD) in the UK is a further example of enhanced digital reporting requirements for VAT. Under this regime, businesses are required to maintain a robust electronic audit trail of digital links from their original VAT records (e.g. Accounts Payable and Accounts Receivable) right through to submission of summary data to HMRC as part of the VAT return process. Although no additional data is submitted to HMRC under the MTD requirements, the digital journey of VAT data in a business will no doubt feature as part of any HMRC interventions or audits.

The currently fragmented nature of digital reporting requirements across the EU (as well as outside the EU) poses a significant challenge for businesses. The European Commission has commenced a review of the various types of DRRs and is scheduled to present a legislative proposal for EU-wide reform by the end of 2022. Any such proposal would then require the unanimous approval of the 27 Member States as well as sufficient lead in time for businesses to adapt, meaning that any harmonised changes are likely to be a number of years away.

The options under consideration by the Commission include the development of a common EU digital reporting standard for all transactions, the development of a common standard for reporting intra-EU transactions only and the introduction of a requirement for taxpayers to record transactional data in a pre-determined format (which could be accessed by the tax authorities on request).

Input has also been requested as regards the design and scope of any new reporting standard to be introduced. Where countries have already incurred significant costs in developing and implementing their own transaction based reporting systems, they may be less willing to agree to a new EU wide reporting standard for domestic transactions (if different to the one they use). They may, however, be willing to agree a new common reporting requirement for intra-EU transactions to replace the current VIES system. As with any proposals for changes at an EU level, achieving consensus on a way forward will be a challenge.

Revenue has, in our view, quite wisely not rushed to introduced similar changes to those we are seeing elsewhere in the EU. Given the potential impact of any such changes on business, it is crucially important that they strike a balance between Revenue’s desire to obtain more effective and timely data and the burden on businesses to meet these requirements. Similar to the recent changes for PAYE Modernisation, we expect that Revenue will hold an open and engaging consultation process before introducing any changes. It will also be important to monitor developments of the European Commission’s review as any new system in Ireland should comply with any harmonised requirements introduced at an EU level.

It is not possible at this stage to predict the timing or impact of any potential change to VAT compliance in Ireland. However, ultimately, any change will likely involve businesses recording and (potentially) reporting data in a structured and digitised manner to support their VAT figures. As there are already detailed requirements to maintain books and records for VAT purposes, in many cases, businesses already have the foundations in place to be ready for new VAT reporting requirements.

By implementing best practices in their current VAT “record to report” processes, businesses will not only be in a position to manage any future changes, but to also deal with any Revenue eAudits or interventions that may occur in the meantime in a timely manner. In our experience, these best practices can also deliver operational efficiencies in how VAT is managed in the business and may include the following:

• Master Data – How is the organisation’s master data used for VAT compliance?
• VAT Logic – Does the business’s finance/Enterprise Resource Planning (ERP) system contain sufficient VAT logic to allow for VAT reporting with minimal manual intervention?
• Reporting – What detective controls are in place to identify exceptions or business process exceptions that may result in incorrect VAT treatments being reported to a Tax Authority?

Of course, businesses which have VAT registrations in other jurisdictions outside of Ireland may already be or may soon be affected by the digital reporting requirements in those countries. In such cases, businesses should track where and when they may be impacted, establish whether their existing VAT compliance infrastructure can meet these requirements, and evaluate how these varying requirements can be aligned with their existing ERP system (which may not be equipped to deal with these changes). It may be necessary to assess what alternatives are available to meet these changes, for example, through outsourcing all or parts of the VAT compliance process, obtaining additional pieces of software or undertaking a broader business review of how data is gathered and captured.

To assist businesses with keeping track of global developments in this area, KPMG has created a free online e-invoicing and digital reporting global tracker, which is updated regularly. If you would like to receive monthly alerts notifying you when the tracker is updated, you can subscribe to the KPMG “Indirect Tax” TaxNewsFlash.

Please contact David, John or your usual KPMG contact if you would like support in undertaking such a review or require advice on how to efficiently manage tax risk and compliance.

Revenue audits & other interventions 

The evolution of e-Audits, trends in respect of interventions from the Revenue Annual report, and technologies used by Revenue

The Digitalisation of Tax

Jointly presented by the Irish, Australian, Hong Kong and UK Tax Institutes, and featuring John Curry, principal in KPMG tax transformation & technology

10 minutes on Tax: CT Compliance Efficiencies

With Stephen Keohane, tax partner, Aileen Carroll, tax director & Tim Duggan, tax director