Even though the UK will not be adopting them any time soon... 

Contrary to what you might expect the founder and CEO of an e-invoicing business to say, the UK will not be adopting continuous transaction controls (CTCs) any time soon, and that is a good thing. However, CTCs are being implemented by many of the UK’s trading partners in Europe and across the world, so what do business leaders need to know to ensure they understand and comply with the increasingly complex international rules and regulations around digital tax reporting and collection?

What are CTCs? You wouldn’t be alone if you said you’d never heard of them, but CTCs are being used by governments and tax authorities around the world to determine how much tax businesses should pay. In an increasingly digital economy, regulators are using CTCs to ‘tap’ directly into the transaction processes between businesses to assess what tax is due, and by whom, rather than wait for businesses to report their indirect tax liability afterwards.

The most common form of this type of indirect tax is VAT, which is now used in over 140 countries worldwide, but also includes customs duty and – most notably in the US – sales tax. In a typical advanced country, indirect tax accounts for about one third of the total tax revenue collected by governments. At varying paces around the world, governments are implementing CTCs to protect and enhance their indirect tax processes and revenues.  

CTC checks are made on individual transactions and are recorded by the country’s tax authority at time of transaction; unlike established checking methods, where typically transactions are recorded on a local ledger, and then periodically reported to the tax authority. Mandatory e-invoicing is generally required to enable this kind of real-time reporting.

Alongside raising more taxes in a digital-first world economy, the primary reason for implementing CTCs is to reduce tax fraud. With VAT fraud endemic in many countries, it is hoped that CTCs will help to bridge the gap between digital and non-digital transactions and reduce losses to fraud. CTC implementation is well advanced in Latin America, for example, with Brazil, Mexico and others now having well implemented systems, and there has been, at least some evidence that the indirect tax collection has improved.

In the European Union the most common form of VAT fraud is Missing Trader Intra Community fraud, or MTIC. In recent years instances of Missing Trader fraud have become increasingly complex, but one thing is constant: somewhere in a supply chain a fraudster charges VAT on a trade but fails to pay the VAT due to the relevant, national tax authority. The trader ‘disappears’ – hence the ‘Missing Trader’ part of the title. Missing Trader fraud has always plagued VAT collectors.  According to the most recent figures from the European Commission the VAT lost to fraud was EUR 140 billion per annum, over 11% of the tax due. Governments hope CTCs will make most types of VAT fraud impossible, or at least harder to get away with.

As the first country in Europe to implement mandatory B2B e-invoicing, Italy has led the way on CTC, with all transactions sent to the Italian Revenue Agency, via its Sistema di Interscambio (SDI). France now also has well established plans for a CTC roll-out, starting in 2023. Interestingly, each country in the world has chosen to implement its own checking system, with different processes and technical standards, rather than standardise or cooperate. Governments can be very sensitive about their ability to collect their own taxes, so perhaps this is unsurprising.

The situation in the UK is more nuanced. To go back to the fact that the fundamental motivation for implementing CTC is to reduce tax fraud, the UK suffers much less VAT fraud than, for example, Latin America or Italy. Of course, VAT fraud exists in the UK, however, nothing like on the same scale as it does in many countries. MTIC is also much more difficult to detect in cross-border trade, which is encouraged in the EU, but which is now somewhat discouraged in the UK, post Brexit.

The reasons why the UK will not be implementing CTC any time soon vary. The primary reason being because politically voters are not in the mood for central government to embark on big expensive new projects. Neither is there much public desire for governments to interfere in the day-to-day operations of businesses, major tech giants apart. Secondly, VAT fraud is not endemic in UK; most VAT fraud occurs in cross-border trade, and the UK is trading less with Europe following Brexit. Now the VAT regime has changed, the potential for carousel VAT fraud has also diminished.

Italy is implementing CTC to prevent fraud. France has no problem with CTC, as they have an embedded tradition of centralisation and state bureaucracy. The Germans are on board with CTC because they are wedded to technical standards. Here in the UK, the government is loath to interfere in our business processes, nor do we want them to; and we are not overly concerned about technical standards.

Ultimately, CTCs are currently a step too far for the UK; a step closer to central control over consumer and business transactions; and the fact that the UK has relatively low rates of VAT fraud means they are entirely unnecessary. As a result, the UK will not be adopting continuous transaction controls (CTCs) any time soon, and that is a good thing. But businesses beware – if you are trading outside of the UK, be that with LATAM or some areas of the EU, you are likely to encounter CTCs and may want to consider working with an expert to register and deliver your invoices in a compliant way.