After nearly two years of negotiations, the Council has reached an agreement on the VAT reform package, marking a pivotal step in the EU's digital transition, and strengthening its competitiveness. The new rules modernise VAT systems to align with the digital economy, enhance efforts to combat VAT fraud, and simplify administrative requirements for small businesses and individual service providers.
Key Elements of the Agreement
The agreement includes three legislative acts: (i) a directive, (ii) a regulation, and (iii) an implementing regulation, which collectively address various aspects of the VAT system:
A. Digital VAT Reporting by 2030:
- VAT reporting for cross-border transactions will become fully digital, using a real-time system based on e-invoices.
- Businesses will issue e-invoices for cross-border transactions, automatically sharing data with tax administrations.
- A unified IT system will analyse and share data between national authorities, helping detect and combat VAT fraud.
- All existing national systems must be interoperable with the EU system by 2035.
B. VAT for the Platform Economy:
- Online platforms will assume responsibility for collecting and remitting VAT in cases where service providers (e.g., short-term rental hosts or drivers) do not pay VAT themselves.
- The new rules aim to address VAT non-compliance in the platform economy and create fair competition with traditional services.
- Flexibility is granted to member states to exempt small and medium enterprises (SMEs) from the deemed supplier rules and define short-term rental accommodations.
C. Expanded One-Stop Shop for VAT Registration:
- The existing one-stop-shop system from cross-border VAT reporting will expand to cover business-to-consumer sales within a single member state, such as electricity or gas.
- This extension will reduce the need for multiple VAT registrations, enabling businesses to manage VAT obligations via a single portal.
Additionally, the Council introduced the mandatory use of the reverse charge mechanism for certain transactions and deferred extending the deemed supplier provisions to all goods and own-goods transfers. Changes to VAT on works of art and antiques were also excluded.
Taking a look back
The 2023 VAT Gap Report revealed that EU countries lost €99 billion in VAT revenue in 2020. Conservative estimates attribute around one-quarter of these losses to VAT fraud related to intra-EU trade. Moreover, the current VAT system remains challenging for businesses, particularly SMEs, scale-ups, and those engaged in cross-border operations.
The VIDA initiative proposes key measures that could enable EU countries to recover up to €18 billion in VAT revenue annually, including €11 billion specifically from anti-fraud efforts, while fostering growth for businesses, especially SMEs.
The proposed reforms aim to close the EU VAT Gap and to enhance the efficiency of the VAT system for businesses. These changes are built around three key pillars:
- Standardised Digital Reporting and E-Invoicing: Introduce common Digital Reporting Requirements (DRR) and mandatory e-invoicing for intra-community transactions.
- Addressing Challenges in the Platform Economy: Clarify rules for short-term accommodation rentals and passenger transport services, strengthening the role of platforms in VAT collection.
- Simplifying Registration Requirements: Expand the scope of the One Stop Shop (OSS) and broaden the application of the reverse charge mechanism for B2B transactions.
The proposed rules, set to be implemented between 2024 and 2028, are outlined in greater detail below:
A. E-Invoicing
Effective January 2024
- Member States will be able to mandate e-invoicing without requiring prior authorisation from tax authorities, as is currently the case in most Member States.
- E-invoices must comply with the European Standard EN 16931, originally established for business-to-government (B2G) transactions under Directive 2014/55/EU.
- The issuance of e-invoices will not require acceptance by the recipient, and summary invoices will no longer be permitted.
Effective January 2028
- E-invoicing will become the default method for issuing invoices. While Member States may still accept paper or alternative formats, e-invoicing will be mandatory for intra-community supplies of goods and services.
B. Digital Reporting Requirements (DRR)
Effective January 2028
- Transition to a New System: Recapitulative statements will be replaced with a Digital Reporting System (DRS) for intra-community transactions, designed to combat missing trader fraud.
- Scope: The DRR will cover all transactions currently included in recapitulative statements, as well as transactions subject to the domestic reverse charge mechanism under Article 194 of the EU VAT Directive.
- Data Requirements:
- Businesses must provide detailed transaction-level data rather than aggregated data by customer.
- The data must be submitted electronically using systems provided by Member States.
- While the European Standard EN 16931 will be the preferred format, Member States may allow other formats if they ensure interoperability with the European standard.
- Submission Options: Data can be transmitted either directly by the taxpayer or through a third party on their behalf.
- Domestic Reporting: Member States may extend DRR requirements to domestic transactions, aligning them with the mandatory DRR for intra-community supplies.
- Harmonisation Goal: By 2028, the Commission expects the digital reporting systems in various Member States to converge with the new requirements.
C. Platform Economy
Effective January 2025
- Clarification of Facilitation Services: Services facilitated by platforms for non-taxable persons will be classified as intermediary services rather than electronically supplied services. The place of supply will align with the location of the underlying transaction, as defined by the EU VAT Directive.
- Deemed Supplier Regime: Platforms in the accommodation and passenger transport sectors will adopt the deemed supplier regime. If the service provider does not charge VAT, the platform will account for and remit VAT on the supply.
- Extension for Goods Supply: The deemed supplier regime will be extended to cover all B2B and B2C goods transactions facilitated by platforms, whether provided by EU or non-EU suppliers.
- Mandatory Import One-Stop Shop (IOSS) for Platforms: Platforms facilitating certain imports of goods to consumers in the EU will be required to adopt the IOSS regime, which is currently optional.
D. Single VAT Registration
Effective January 2025
- Expanded Union One Stop-Shop (OSS) Scheme: The scope of the Union OSS will include additional B2C supplies of goods, such as:
- Goods supplied with installation or assembly.
- Goods supplied onboard ships, aircraft, or trains.
- Supplies of gas, electricity, heating, and cooling.
- Domestic supplies of goods.
- Margin Scheme Dealers: Declare operating under the margin scheme for second-hand goods may opt to register under the Union OSS to declare and pay VAT on cross-border supplies.
- Mandatory Reverse Charge Mechanism: The currently optional reverse charge mechanism for B2B supplies under Article 194 of the EU VAT Directive will become mandatory. This removes the need for non-established suppliers to obtain a VAT registration number in the Member State where VAT is due.
- Call-Off Stock Simplification: The call-off stock simplification under Article 17a of the EU VAT Directive will be phased out, ending on 31 December 2025.
- New OSS for Transfers of Own Goods: A broader OSS scheme will cover transfers of own goods between Member States during sales to consumers, replacing the current call-off stock arrangements.
- Extended Non-Union OSS Scheme: The non-Union OSS will now cover all services supplied by non-EU suppliers to non-taxable persons, regardless of whether they are based in the EU.
Background and Next Steps
The "VAT in the Digital Age" package, presented by the Commission in December 2022, comprises three proposals to modernise VAT rules and administrative frameworks:
- A proposal for a Council directive amending directive 2006/112/EC as regards VAT rules for the digital age;
- A proposal for a Council regulation amending regulations (EU) No 904/2010 as regards the VAT administrative cooperation arrangements needed for the digital age;
- A proposal for a Council implementing regulation amending implementing regulation (EU) No 282/2011 as regards information requirements for certain VAT schemes.
The Council has made significant amendments to the directive, requiring further consultation with the European Parliament before formal adoption. Once approved, the legislation will be published in the EU's Official Journal and enter into force.
How we can help
At Grant Thornton Malta, our VAT team is prepared to guide you through the Vida package and its impact on your VAT obligations. We are here to help you understand the new rules surrounding electronic invoicing, the changes to the place of supply regulations, and the implications of the single VAT registration and domestic reverse charge procedures. As we move towards a future where all invoices will be exclusively electronic by 2028, our team is ready to assist you in navigating this new landscape. For more information, please reach out to our team of experts. Trust Grant Thornton to be your partner - we allow you to focus on what you do best, while our dedicated team does the rest.
