VAT in the Digital Age Finally Receives Approval

The European Commission first published the VAT in the Digital Age (ViDA) package in December 2022. It has been a long journey with some significant changes to the original proposals but on February 12, 2025, the European Parliament gave their approval to the various measures. The final stage will be approval by the Council of European Union which is expected in March 2025. However, given the delays in reaching this stage, the timeframe for implementation is significantly different from that originally proposed.

The purpose of ViDA is to bring the VAT system up to date to take account of how businesses have utilized technology to revolutionize supply chains in certain sectors. It will introduce the increased use of technology to modernize the reporting of transactions so that the VAT gap can be reduced—the most recently reported EU VAT gap was €89 billion in respect of 2022. The package seeks to build on the positive experiences of some member states who have already used technology to achieve greater VAT compliance increasing the tax yield and reducing the VAT gap. Finally, it will seek to reduce VAT compliance for businesses that are trading across the EU by making it easier to account for VAT on sales in other countries.

There were three pillars in the original VIDA proposal and these remain:

1. Introducing a real time digital reporting system for cross-border transactions based on e-invoicing.

2. Expanding the rules for digital platforms to cover the provision of short-term accommodation and passenger transport.

3. Expanding the single VAT registration under the One Stop Shop (OSS) scheme.

E-invoicing and Digital Reporting

A number of member states already mandate e-invoicing and have introduced continuous transactions controls and digital reporting requirements (DRR) into their domestic legislation with the result that different obligations currently apply across the EU. This has caused issues with agreeing on a new framework, and there were several changes from the original proposal. Originally scheduled for 2028, many of these changes will not come into effect until July 1, 2030.

E-Invoicing
Member states will be able to require established businesses to use e-invoicing for local sales without approval from the EC as currently required. This measure will apply from when the package is accepted by the EU Council so we could see this imposed in some member states soon. The customer will not be able to refuse to accept e-invoices so, if mandatory e-invoicing is introduced, accounting systems will have to be able to accept them to achieve VAT recovery.

For e-invoicing of transactions that are subject to the EU DRR, they have to meet the EU standard format but member states can allow other formats for transactions such as local sales. This creates a risk that there could be multiple requirements in place which could cause complexity. In practice, businesses will have to ensure that their e-invoices meet the most comprehensive requirements as this will ensure universal compliance.

The UK government has recently launched its own e-invoicing consultation so UK businesses could see this requirement being imposed in the future – the consultation runs until May 7, 2025. Compulsory e-invoicing is the pre-requisite for DRR, and the UK government is asking for feedback on what DRR system the UK should adopt. It has, however, already advised that it does not plan to explore a centralized model where the tax authority processes all invoices on the grounds that it does not necessarily improve business efficiency and is expensive for the tax authority to implement. In practice, it is likely to be some time before such a requirement is introduced in the UK which has, to date, lagged behind other countries in receiving transactional data despite the introduction of Making Tax Digital which only impacted how the figures on the VAT return were received rather than how they had been calculated.

Digital Reporting
Digital reporting is already used in a number of member states with the result tax authorities receive detailed transactional information on a real-time or near real-time basis allowing them to reduce the VAT gap. This contrasts with traditional VAT reporting where the tax authority only receive the net figures on the VAT return and have to carry out audits if they want more information.

From July 1, 2030, there will be a requirement for digital reporting of intra-EU sales of goods, intra-EU acquisitions of goods, reverse charge sales of goods and services for which the customer is liable under the reverse charge mechanism and purchases of services under the reverse charge. However, if a member state had in place or announced a real-time reporting system before January 1, 2024, they have until January 1, 2035, to align their system with the EU-wide requirements. This applies to many countries so there will divergent systems in place until 2035.

As is often the case with VAT requirements in the EU, member states have flexibility in how they apply the new rules and can decide not to require reporting of acquisitions and reverse charge purchases – this is similar to EC Sales Lists in that some member states require EC Purchases Lists. One of the benefits of DRR is that it will remove the need for EC Sales and Purchases Lists as the information will be obtained from the digital reports. It should be noted that digital reporting will not only apply to established businesses in a member state but also to non-resident businesses that are registered for VAT locally.

One notable exclusion from DRR is the transfers of own goods as they will be covered by the extension to the Union One Stop Shop as detailed below so tax authorities will already be receiving information about these movements.

Member states can also mandate that all sales will have to be reported digitally and not just those required under the EU mandate. This may create challenges in determining how the local requirements interact with the EU mandated reporting. Where a member state does require all sales to be reported, it can require the purchaser to hold a valid e-invoice in order to be able to recover VAT – this represents a significant change from the current rules and could create challenges to securing recovery.

Digital Platforms

Digital platforms are increasingly present in e-commerce and there are already rules in place which make the platforms liable for accounting for VAT on supplies of electronically supplied services. The logic is that it is much easier to collect tax from large platforms than seeking out the individual sellers.

ViDA will extend this marketplace liability for platforms for supply short-term accommodation and passenger transport and impact how they account for VAT on some transactions. Examples of platforms in this context are Airbnb and Vrbo for accommodation and Uber and Bolt for transport. The changes are intended to put purchases via these platforms on the same footing as supplies made by traditional players in these markets such as hotels and taxi companies.

The changes have been divisive as some tax authorities were concerned that the original proposals had the potential to further distort competition and breach neutrality. They were originally scheduled for January 1, 2025, but will now be effective from July 1, 2028, although member states can choose to opt out until January 1, 2030. It is thought that some member states may seek a derogation to apply the provisions at an earlier stage so that they can be used to deal with challenges that they are having in their economies – for example, the proliferation of properties that are being used for short-term rental that is pushing out local residents.

In order to remove the issues seen by some member states, they can exclude supplies of these services made by businesses who are exempted from VAT under the special mechanism for small enterprises. This appears to be on the basis that VAT would not have been due if the sale was made directly to the end user by the business as they are not liable to account for VAT on their sales. We will need to wait and see which member states, if any, take this option. Additionally, if the underlying supplier provides the platform with a valid VAT number in the member state in which the VAT is due, the marketplace liability does not apply—this could be a local VAT or One Stop Shop number.

Some businesses in this sector have historically argued that they were not principals so only had to account for VAT on their commission. This has been successfully challenged so they are now using the Tour Operators Margin Scheme (TOMS) so that VAT is only accounted for on the margin that is achieved which is essentially the same as their commission. The new rules will exclude platforms from using TOMS so VAT will be due on the full selling price. This has been an issue considered in the Upper Tribunal in the UK in the case of Sonder Europe Ltd which entered into long-term leases for apartments which is then supplied as short-term accommodation. The latest decision is that TOMS does not apply to these supplies so VAT is due on the full amount paid although it is expected that further litigation will take place.

Single VAT Registration

The European Commission has long had the aim of allowing businesses to be solely registered in their home member state and use that registration to account for VAT throughout the EU. This would greatly simplify VAT compliance for businesses and aligns with the concept of a Single Market which is rather hampered by many businesses having to register for VAT in multiple member states. Previous attempts have failed and the latest mechanism towards a single VAT registration is being achieved through the extension of the OSS. This will allow more transactions to be accounted for via the OSS but crucially does not allow for input tax recovery. As a result, if a business has input tax to recover in a member state, for example on the local purchase of goods, it may decide to remain registered in that country rather than to use OSS and make a claim via the Refund or 13th Directives which will normally have a negative cashflow impact. Therefore, whilst this is a step in the right direction, it is not really a single VAT registration as it does not have the required functionality to account for and recover VAT in all member states.

These changes were originally scheduled for January 1, 2025 but, as with the digital platform changes, are now proposed for July 1, 2028.

Extension of OSS
One of the common reasons for additional VAT registrations is businesses moving their goods between member states to create a local stock of goods to better service their customers. This is especially common in the e-commerce sector particularly when sales are made via platforms such as Amazon and also where businesses create call-off stock for their business customers. From 2028, these transfers can be included on the quarterly OSS return so any registrations required for these movements can be cancelled—the call-off stock simplification introduced by the 2020 Quick Fixes will also be withdrawn as it will be redundant.

There are some B2C sales of goods that cannot be included on OSS currently including sales of installed goods and goods on board ships, aircrafts and trains. These can be included from 2028 as will local sales of B2C goods by non-established suppliers which currently require a local VAT registration.

Local Sales by Non-Established Sellers
ViDA introduces another mechanism to reduce the number of registrations required by non-established businesses who are making local B2B sales of goods and services. Many member states currently have this mechanism in place which shifts the liability to account for VAT from the non-established supplier to their business customer. This will become compulsory in all member states but tax authorities will have some flexibility in how they implement the measure, for example, by only applying the reverse charge where the customer is an established business rather than just VAT registered. In the case of goods, the non-established supplier may still be incurring local VAT on the purchase of the goods so will need to redetermine how best to recover this VAT as the OSS returns will not allow for any recovery of VAT on costs. As a result, some businesses may decide that OSS does not provide the optimum solution given the delays in securing VAT recovery via the Refund and 13th Directives which can often run to many months and on occasion, years. In this case, VAT registration in individual member states may continue to be used so that cash flow can be managed more effectively—this will need to be decided on a case by case basis by each business.

ViDA and the Import One Stop Shop (IOSS)
The original proposals included changes in respect of IOSS which can be used to account for VAT on a single return on B2C imports into the EU in consignments with an intrinsic value of less than €150. The IOSS changes are now part of the proposed 2028 Customs Union reforms. This will see the removal of the €150 customs duty threshold which is widely being abused with goods being undervalue so as to avoid payment of customs duty – the European Commission estimates that up to 65% of imports are undervalued. The removal of the duty threshold will allow the IOSS threshold to also be abolished so that it can be used for transactions of any value.

This will remove the current issue for suppliers in having to have different solutions in place for goods above and below the €150 threshold. They will however have to make a choice whether to use the simplified duty collection approach which allows for a much simplified import process or the existing process. Use of the simplified process will means goods are classified into one of five buckets with set duty rates – this will remove the need for full classification of the products but it does mean that duty is payable regardless of the origin of the goods so no preferential rates will apply. The alternative is to make a full customs declaration which will allow preferential treatment to apply which could remove the duty charge. The original estimate from the European Commission is that the changes will generate an additional €1billion of customs revenue per year. Each business will have to determine what is right for their business taking into account the nature and origin of their goods.

This change in the EU could also see a change in the UK in the future. The UK currently has a threshold of £135 below which no customs duty is due. The main issue with removal is the cost of collection of relatively small amounts of duty—this was the reason for the thresholds in the first place. The EU is solving this by using IOSS for payment of VAT and duty. The UK took a different path and there is no import VAT on goods below £135 with the supplier having the liability for accounting for the VAT due by registering for UK VAT. It is unclear how efficient this is in collecting the correct amount of VAT due on these sales and it does not appear that it provides a mechanism for payment of customs duty.

Conclusion

ViDA has taken a long time to reach this stage and whilst most of the changes are not going to happen for a few years, businesses need to start considering how they will be impacted and make appropriate plans.

The introduction of DRR will increase the reporting requirements for businesses and will require new systems to be introduced—the phasing in of the new rules over a number of years will lead to additional complexity for businesses trading in multiple member states which will need careful management. Current and future supply chains will need to be mapped so that the DRR changes can be fully understood.

The platform changes apply to a relatively small number of businesses who will need to understand how they are impacted. However, it can be expected that platforms will increasingly be used to collect VAT in the future so further changes may take place—ViDA originally proposed that marketplaces would be liable for sales made by EU established suppliers but this did not go ahead after lobbying by the platforms.

There is some good news in the extension of OSS especially for the large number of e-commerce businesses that regularly move their goods around the EU to improve delivery times for local customers. However, whilst OSS will simplify accounting for VAT, it will not allow recovery of VAT so a cost benefit analysis will need to be carried out to determine the optimum VAT registration profile.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Andy Spencer is the Director of VAT and Customs Duty Services at Crowe in the UK.