Regulations around electronic invoices are rapidly changing. Whilst all countries adopt the electronic invoice, not all have the same model of financial control. In France we are governed by the Post Audit model, but with Article 56 of the Finance Act 2020 presented on 27 September 2019, France is moving towards a Clearance model.
Post-Audit or Clearance model for e-invoicing?
To control VAT in B2B (Business-to-Business) circumstances, and in the fight against fraud, there are two control models to consider:
The Post-Audit model
Currently used in France and in most European countries (with the exception of Italy and soon Greece). Business partners issue, receive, and archive paper and electronic invoices. Businesses are required by regulation to ensure the authenticity, integrity and legibility of these invoices. The tax administration operates VAT and anti-fraud checks on company records and archived invoices.
The Clearance model
This is a tripartite model between seller, buyer, and administration. Prior to the issue of each invoice, the supplier of a good or service must receive approval from administration before charging the buyer. Thus, the issue of each invoice is declared and authorized by the tax authorities. The invoice is registered with the tax authorities immediately, and “approval received” is mentioned on the invoice. Administration is aware of the amounts of VAT being collected. This model is already used in many Latin American countries, Russia, and China.
Section 153 of the Finance Act 2020 and the Clearance model
The Finance Act 2020 states that:
“Invoices for transactions between value-added tax are issued electronically and the data in them is forwarded to administration for operations purposes, including modernizing the collection and control of value-added tax.”
“The government is submitting to Parliament, before 1 September 2020, a report on the conditions for implementation, at the earliest from 1 January 2023 and no later than 1 January 2025, of the obligation to bill electronically in business relations. This report identifies and evaluates the most appropriate technical, legal, and operational solutions, including the transmission of data directly to the tax administration, taking into account the operational constraints of stakeholders. It assesses, for each of the options under consideration, the expected gains in value-added tax recovery and the expected benefits for businesses.”
Towards a change in the way invoices are transmitted …
By making the electronic invoice (e-invoicing) mandatory for all inter-company exchanges, the government is considering as its next step the transmission of the electronic invoice directly to the tax administration. This will give the tax administration access to all billing data, and the full and perfect visibility of VAT being collected in real time.
Big changes soon to come for the electronic bill?
The electronic invoice will become a legal requirement over the period 2023–2025 for all B2B transactions. In addition, the continuous control of transactions is already under consideration.
Establishing this system is a matter of setting up a “monitored mode” or a Clearance model. The core idea is that the tax administration intervenes between the seller and the buyer in order to carry out tax and VAT checks. In a Clearance model the administration has two ways to collect VAT:
The principle of Split Payment is based on the provider opening a special bank account to receive the collected VAT. Upon receipt of payment of the invoice (without VAT]) net amount reaches regular bank account of the seller and VAT amount is transferred to a special VAT bank account. This special VAT account supervised by the tax administration can only receive VAT and refund operations. Poland and Italy have chosen this mode of operation.
The principle of e-reporting is that suppliers and buyers report their transactions on a government platform via e-books, and continue to file their VAT returns on the basis of their accounting ledgers. If a discrepancy arises between e-reporting and VAT returns, the company can correct the discrepancy or justify it. This mode has been chosen in Greece with the myDATA (My Digital Accounting and Tax Application) platform.
Model clearance: the Italian example
Italy, Europe’s leading country for VAT fraud, began implementing a Clearance model in early 2019. Today, the scheme affects 3.6 million Italian companies. The Clearance model also includes B2G billing.
The Italian Clearance model relies on an exchange server called SDI (Sistema di Interscambio), between the invoice transmitter and the receiver. This SDI records invoices, transmits, and archives them. In return, it produces follow-up information on the invoice processing end. And the system manages the delivery code required on each invoice by law, and inserts the VAT numbers of both parties.
Implementation of the Clearance model leaves some questions unanswered …
The future implementation of a Clearance model is a near certainty internationally. This shift towards greater transparency is the current trend. Companies will provide their local tax administration with real-time social, accounting and financial data. In exchange, the tax administration will facilitate their administrative tasks by offering VAT pre-reporting services.
But before that, key points remain to be clarified:
- Its limits:
- Billing types: B2G, B2B and B2C?
- Bills issued abroad: Eurozone, or out with the Eurozone?
- Should the timetable for implementation be according to company size?
- Which electronic invoice formats will be accepted: EDI Tax, structured files, signed or simple PDFs, Factur-X for online payments?
- The type of platform that will be used:
- A platform like the SDI in Italy?
- An extension of Chorus Pro to the private sphere?
- Third-party platforms communicating with the tax administration’s information system?
What are the consequences for businesses?
After the adoption of electronic invoices, the issues surrounding a move to a Clearance model present significant changes for companies.
The fact that the tax authority interferes between the issuer of the invoice and the receiver, and whether or not to approve the invoice, is a major regulatory and technological constraint, which will impose new steps on the billing services of companies: follow-up of applications for approval, and mentions of approval on the invoice, for example.
A model of operation with similar regulatory and technical constraints already exists. These are customs clearance operations, where operators submit requests for customs authorizations for services. For this reason, customs services offer a portal accessible to all and major operators (import-export companies, large companies) go through platforms approved by the customs office.
A new IaaS (Invoice as a Service) service?
This suggests that in the near future, IaaS platforms will offer companies a set of services around invoicing: billing, factoring, VAT management, etc.
For more than 30 years we have supported our clients in the implementation of their electronic billing and paperless taxation. Today the “everything paperless” trend involves big changes for companies. In order to anticipate and prepare for these developments, Tenor participates in various working groups (FNFE and GALIA and GS1).