What’s next for VAT in the UK? Get ready for the introduction of e-invoicing

In its Autumn 2024 Budget, the UK government outlined a package of reforms to the UK tax system. As part of this, HMRC will be launching a consultation on electronic invoicing (e-invoicing) in early 2025, to promote its wider use across UK businesses and government departments. Following on from the introduction of digital filing for VAT returns in 2019, this consultation represents a further step towards HMRC realising its vision of becoming a digital-first organisation. What’s driving this shift? Until now, there hasn’t been any UK legislation on e-invoicing or real-time VAT reporting, and the advantages of e-invoicing and near real-time VAT data for tax authorities are obvious. HMRC is keen to encourage the uptake of e-invoicing so it can close the current VAT tax gap, combat fraud, and prevent unintended errors in VAT returns. In that respect, it’s following in the footsteps of tax authorities around the globe that are pushing ahead with e-invoicing and live VAT reporting initiatives. Alongside delivering greater transparency and enhanced accuracy when forecasting VAT tax receipts, e-invoicing can help reduce opportunities for tax evasion and support faster and more effective audits. To be clear, e-invoicing refers to feature machine readable data and standardised fields that enable system-to-system communication and ease of data exchange; rather than invoices in an electronic format (PDF, word file or PNG) that can be stored and sent digitally. Worldwide, more than 80 countries now have e-invoicing mandates in place. In Brazil, e-invoicing has been a requirement for all established businesses since 2006 and the Brazilian government operates a centralised platform organisations must use to register and validate every invoice they receive. In addition to performing authenticity and tax calculation checks, this system automatically records all transactions in government databases. In the EU, the European Commission’s VAT in the Digital Age (ViDA) 2022 proposals aim to make real-time digital reporting and e-invoices compulsory for all EU states by 2030. The scheme aims to further reduce a significant EU-wide VAT tax gap, which hit an all-time high of €99 billion in 2020. Over a third of these losses were attributed to VAT fraud linked to intra-EU trade. E-invoicing: the benefits for business Whether the 2025 UK consultation will result in the mandation of e-invoicing or not, its adoption would certainly deliver a number of benefits. These include automating laborious manual processes and making it easier and potentially faster to get paid. By supporting the automation of VAT reporting, e-invoicing minimises the likelihood of tax return errors and reduces the risk of accidental under reporting. It also standardises how e-commerce transactions are tracked, which in turn will make it easier for companies to comply with global tax requirements. Facilitating better invoice tracking and management, helping deliver more accurate financial planning and analysis too. However, the implementation of new e-invoicing standards into existing systems involves the transition to structured data to ensure invoices meet government validation standards and the realignment of workflows and systems to ensure IT, finance and operations are in alignment. Something that is proving challenging for many European countries. In the EU, France was scheduled to introduce e-invoicing in July 2024 but has now shifted this deadline to September 2026 for large and mid-sized businesses, and September 2027 for small businesses. Meanwhile, negotiations continue among EU states on fine tuning the local adoption of ViDA rules into their national VAT legislation. E-invoicing: the wider considerations for UK PLC Until HMRC releases its consultation framework, it’s difficult to know what the scale and scope of the e-invoicing scheme for the UK is likely to look like. However, there will undoubtedly be a number of hurdles to overcome. The UK operates one of the most labyrinthine tax systems in Europe and the introduction of e-invoicing will need to take account of how, if at all, the requirements will interact with the complex part of VAT calculations – everything from partial exemptions through to fuel scale changes, cycle-to-work reliefs, indirect tax adjustments and more. The introduction of e-invoicing will also impact major business systems such as CRM and ERP tools. Which means organisations may need to introduce new software, or amend existing products to ensure they can generate, send, and store e-invoices in accordance with mandated standards, handle their VAT reporting responsibilities and realise all relevant VAT exemptions that apply to their business. Looking ahead The government’s announcement that it intends to push forward with modernisation initiatives that will improve how businesses report VAT is a welcome one. Since the introduction of MTD for VAT in 2019-20, little further progress has been made in the digitalisation of the tax system. This has proved frustrating for businesses that put significant effort into laying the foundations for big changes. In response, many of these businesses have pushed ahead and driven their digitised tax initiatives forward regardless of HMRC regulations. By participating in the HMRC consultation process, UK businesses will be able to shape how the government promotes and supports the introduction of e-invoicing and ensure they are well prepared and informed on what implementation will involve.

What’s next for VAT in the UK? Get ready for the introduction of e-invoicing

By Russell Gammon, Chief Solutions Officer at Tax Systems

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