We have learned that there are doubts about some of the assumptions in the PWC report in the EC Green Paper on VAT collection released on the December 2nd 2010.
As it is obvious that the next important Single Market step is harmonization of VAT collection it is important to get all facts on the table – and then choose the best and probably also the boldest move. As any change will take time,
it would be unfortunate if a small improvement seriously postpones the much needed big improvement.
We (the Real Time Economy Program) have focused on developing the Split payment model. The latest version – based on the near-future scenario where electronic invoicing is the default option – is simple:
when an e-invoice is sent the tax authority automatically gets the VAT-codes of buyer and seller, the VAT rate and the VAT amount. When the buyer pays the invoice (or a card acquirer the purchases to merchants) the VAT amount is automatically paid to
Tax (where it is coupled to the waiting pre-received information) and the net amount to the seller
(several SMEs have stated that this is to prefer as it may be difficult to track what money received actually belongs to Tax)
. Possible refunds can be handled automatically at the same time (reverse VAT would make the whole system even more efficient).
I now hear that some businesses take a negative view because VAT paid automatically when the buyer pays his invoice will mean that enterprises cannot enjoy a free loan of the VAT to be reported and paid later by them. Another argument is that the recent
financial crises in Denmark was eased by the government giving enterprises one extra month to pay VAT – and in the split payment case such financing would be difficult. It has also been said that the black economy uses cash and cannot be reached by this –
but still if these are the only counterarguments we think that businesses should support this model in their own interest and naturally also look at the benefits for society at large (including rule of law) and how they can benefit by speeding up progress
towards a true Single Market.
The full picture should include analysis of:
1. Tax payers’ interest: Summing up (i) how much more VAT can be collected, (ii) how much cost can be saved by tax collection becoming more efficient, (iii) how much can be saved by smaller need for VAT audit, (iv) what is the value of
stronger rule of law and less cost for criminal processes (v) what is the value for economic policy makers when invoicing figures can be automatically accumulated per sector, region, country, EU and eventually globally at the moment of invoice issuing – and
the changes in payment delays can be measured in the same automatic way etc
These items should then be weighted against the cost for tax authorities to implement the change. We believe that with loosely coupled cloud services the IT investments can be moderate.
2. Business interests: Summing up (i) cost savings from not having to report VAT, (ii) cost savings from VAT payments being automated, (iii) less need for VAT auditing, (initial studies from the above by the accounting profession arrived
at 40-60 million workdays depending on degree of reverse VAT. A bigger benefit than cost saving would probably be that these freed up resources could engage in income creation and higher value support (instead of only driving cost in manual processes) (iv)
legal certainty x-EU, (v) not having to invest in or maintain VAT-reporting systems and (vi) not having to suffer from black-grey economy competitors evading VAT.
These items should be weighted against the negative effects of not having access to 2-3months mostly interest free loan of the VAT to be paid. And as there would be no investment needs by enterprises (as they by this time have migrated to electronic invoicing
for other reasons – like trading partners and the public sector having made it mandatory)
pure and direct self-interest – especially in the SME-sector (65% of turnover in EU) should call for this model – and it must also be in business interest to help the public sector to lower its cost and thus create space for lowering taxes.