To date, 13 countries have implemented increased VAT reporting measures (and a further 3 countries have proposed measures), designed to tackle VAT fraud and close the “VAT Gap”. This is the overall difference between the expected VAT revenue and the amount actually collected, which the latest figures show stood at €159,460 Million in 2014 in the EU.
All the measures that have been introduced or are being proposed share similarities. These common traits are that they allow for an increase in controls and measures for the reporting of tax data. This allows tax authorities to much better audit a taxpayer’s records, in some instances in almost real time, enabling them to determine if the right amount of tax has been declared.
The consequence of this increased checking of data by tax authority is questions being asked of and audits being suffered by taxpayers. We have seen a steady rise in tax authority’s questioning the tax treatment applied by taxpayers. These questions have ranged from just asking for copies of invoices through to complete investigations of the VAT rate/liability applied. In all cases though it causes additional work and costs for a taxpayer alongside stress of not knowing what the outcome might be.
How have Member States adopted increased reporting in practise?
This map shows how many EU Member States have introduced increased reporting measures, or are proposing to do so in the upcoming years. We have provided some information on the different measures below.(Figure 1.)
Many of the Member States that have introduced new reporting requirements have implemented SAF-T. This is a universally recognised accounting system which requires businesses to transmit data to tax authorities in a unified electronic format.
Poland implemented SAF-T in 2016 and by introducing mandatory electronic filing the tax authorities have been able to introduce a level of automation to checks on taxpayers returns. This has led to an increase in the efficiency of data checks and hence tax collection levels have increased alongside tax fraud becoming easier to detect.
The Polish Minister of Finance estimates that the introduction of SAF-T should result in additional tax revenue of more than 17 billion zlotys (approximately £3.5B) within 3 years.
Romania has also introduced similar measures for businesses involved in Distance Selling and the Czech Republic now requires Czech VAT payers to file a Control report alongside their periodic VAT returns. Both measures are intended to reduce the tax gap by discouraging fraud and making it easier for tax authorities to audit businesses
Immediate Supply of Information (SII)
SII takes the concept of increased reporting one step further in that the reporting is completed in almost real-time. This is as opposed to either monthly or quarterly returns, which are the normal return periods.
On 1st July 2017 Spain introduced SII which means that affected businesses are required to report all invoices, issued or received, to the Spanish tax within a four-day time limit via an electronic portal in a specified format.
Any business with an annual turnover more than €6m in Spain, that belongs to a VAT group in Spain, or applies the ‘REDEME’ scheme will fall under the SII regime (this applies equally to non-resident and non-established companies).
Real-time reporting is not a new concept for tax; in Brazil the SPED (SistemaPúblico de Escrituração Digital) system was introduced for certain taxes and businesses in 2008 and has since been expanded with continuing success for the tax authorities in terms of tax revenue and compliance.
Comunicazione IVA trimestrale
Italy introduced a new reporting obligation in May 2017 that requires businesses to electronically communicate their VAT transactions every quarter. This includes every invoice that has been issued or received as well as the VAT data from each periodic payment period.The failure to present the data may result in a penalty of up to € 25,000.
This replaces a system in which the tax authority previously only required an annual VAT return to be filed, alongside monthly or quarterly payments being made. As a result, the tax authorities now see data on a much more regular basis and hence can take steps to rectify what they see a errors in a more prompt manner.
How are the tax authorities working together?
Not only are EU Member States introducing new reporting requirements that allow them to keep a closer eye on taxpayer’s obligation to register for and declare the right amount of VAT within their own country, they are also now working together to help each other collect these debts. The Mutual Assistance for the Recovery of Debt (MARD) Directive was effected on 1 January 2012 and is a legislative tool used to recover debts in other Member States.
Accordance have seen an increasing number of examples where businesses are being sent letters from tax authorities across the EU who believe, from information they have obtained from each other and from third parties, that the company should be registered for VAT in their country.(Figure 2.)How tax authorities reach this decision and the information they use to justify it differs from country to country. We have listed below some examples which we have seen first-hand.
France has been known to collect post office data in order that it can monitor the number of parcels being sent by traders. When they believe that trader might have breached their distance selling threshold they can check to see if the trader meets its obligations. If they don’t, it will go after the trader utilising the MARD mechanism.
Germany has been taking a tough stance towards businesses they believe should be registered, and are making it clear in their communications that they are working with the UK tax authorities:
“If we do not receive the money you owe within 2 weeks after you received this letter, we will be forced to request the appropriate authorities in Great Britain to collect the amount overdue compulsorily. Furthermore outstanding debts of you clients will be impounded and your German VAT identification number will be deleted.”
An accountant recently got in touch with us regarding a letter one of their clients had received from the Finnish tax authorities.
In this particular case, the tax authorities had set out that they had reason to believe that the company had more than likely breached the Distance Selling threshold in Finland. This position had been reached following the review of information obtained from “credit card and payment transfer companies”. The letter set out that the tax authority were planning to register the company on their behalf and had even estimated the VAT that they believed to be due.
The Austrian tax authority has recently been cracking down on distance sellers with retrospective issues by actively seeking out companies that they suspect may have breached the distance selling threshold since it was lowered in 2011. Companies have reported receiving letters from the tax authority prior to registering requesting information on their sales data to prove if they have or have not breached.
The Austrian tax authority also regularly investigate any company they suspect may have breached earlier than stated on their registration application. Should a company declare the wrong date of breach of threshold, the tax authority may apply sanctions and will request that the full VAT due is paid. It is therefore recommended that data be thoroughly reviewed to avoid any discrepancies and make sure that the correct amount of VAT is declared straight away.
How will Brexit affect MARD for the UK?
After Brexit no one is sure what the relationship between the UK and the EU will be like. It could be that MARD remains in place, that the UK leaves completely or that a new arrangement is entered into.
However, whilst there is a still certainty on the use of MARDEU tax authorities are looking to collect money from UK businesses through the scheme before ties are severed.
In our experience, businesses who communicate openly and honestly with the tax authorities, even when they are in a retrospective position, are treated much more leniently than if the Member State’s have to chase for the money that’s owed to them.
We would always advise that businesses ensure they regularly review their sales figures to ensure that they are in a position to register for VAT as soon as they are obliged to do so, especially as the methods that the tax authorities are using track businesses they think should be paying local VAT is increasing and becoming more accurate.