Last week HMRC released a technical note that explains the proposed forthcoming modifications to the existing UK VAT invoicing rules, reflecting the changes introduced by the EU Council Directive 2010/45/EU. Before I give my perspective, perhaps a little paraphrased pre-amble from HMRC will establish their position;
“ The changes assist business by removing or largely reducing current VAT obstacles to the use of electronic invoices, simplifying a number of existing VAT invoicing requirements and removing some existing administrative burdens associated with VAT invoices…
…The aim is now to have a consistent set of rules that will be uniformly applied across the EU, making things simpler and removing uncertainty for businesses. “
So far, so good.
“ …the existing EU rules for electronic invoicing allowed individual member states to impose additional conditions on taxpayers wishing to use electronic invoicing to those imposed on taxpayers using paper invoices. This includes the requirement to use specific technologies such as electronic signatures and Electronic Data Interchange (EDI) as a means of ensuring the authenticity of origin and integrity of content of the invoice…
The UK has not opted to impose any of these additional conditions for electronic invoicing of goods or services supplied in the UK…,”
Ok, so the new EU rules do not allow the UK to impose a specific method for guaranteeing the authenticity and integrity of an electronic invoice. In truth, the existing UK rules are flexible as they indicate that digital signatures and EDI are two compliant methods and that a third option, ‘any other means’ was also possible;
- an advanced electronic signature;
- electronic data interchange (EDI); or
- any other means for supplies within the UK.
What exactly is ‘any other means’? As described by HMRC…
“ …the authenticity of the origin and integrity of the invoice data are guaranteed… as long as you are able to impose a satisfactory level of control over the authenticity and integrity of your invoice data… “
OK, I digress. Let us continue.
“ …but such a requirement remains a possibility in the case of intra-Community transactions, where another member state may require an electronic signature or EDI as a condition of accepting the invoice. For this reason the current UK law includes the options of electronic signature and EDI…”
Well this is smart, as some countries have different thoughts on compliance, and France for example has clear rules for electronic signatures and EDI.
“ …The fact that many member states do impose the requirement to use electronic signatures and EDI has the potential to make the use of electronic invoicing less attractive to business and the differing requirements and rules across the EU is a recognised obstacle to the wider use of electronic invoicing…”
Maybe – maybe not. Spain, Germany and France (and the UK) all use these methods and seem to be doing ok. The Nordic countries are the most successful, but it is not clear if the liberal tax regulations there have provided impetus for adoption, or government mandates or B2C adoption by banks.
“ …Under the new simplified rules individual member states can no longer impose conditions in relation to the use of electronic invoices. Instead, it is for an individual business to determine the method used and the only condition imposed is that the customer must agree to the use of electronic invoicing. In this sense, paper and electronic invoices are now treated equally… ”
Great! e-Invoices are now treated the same as paper and business now get to determine which method they want to use (didn’t they already?). This is really going to help increase adoption! Ok, what are the methods from which a company can choose?
“ …The method used to ensure the authenticity of origin, the integrity of content and legibility of the invoices is a business choice and can be achieved by any business controls which create a reliable audit trail between an invoice and a supply of goods or services.
‘Authenticity of origin’ of an invoice means the assurance of either the identity of the supplier or the issuer of the invoice.
‘Integrity of content’ of an invoice means that the content required to be shown on an invoice has not been altered… ”
Brilliant! What are the common methods for achieving this..!!?
“ …UK legislation will be amended to remove the electronic invoicing and EDI requirements and make it clear that the choice is one for business to make… ”
Wha..? Hang on a minute… So, to make things clear for businesses HMRC is removing the two most established methods of guaranteeing authenticity and integrity from its guidelines?
Ok, Wait a minute, let’s step back a statement or two… how do I now prove authenticity & integrity?
“ …any business controls which create a reliable audit trail between an invoice and a supply of goods or services… “
Alright! That seems pretty straightforward… but what are ‘business controls’? I checked through the technical note, only to find a single reference to the word ‘controls’, and that is in the sentence above. Maybe I should check the existing UK regulations and see what they say;
“ In order to establish the authenticity and integrity of your electronic invoicing you will need to be able to demonstrate that you have control over the:
- completeness and accuracy of the invoice data;
- timeliness of processing;
- prevention or detection of, possible corruption of data during transmission;
- prevention of duplication of processing (by the recipient); and
- prevention of the automatic processing, by the recipient, of certain types of invoice on which VAT may not be recoverable – for example, “margin scheme” invoices.
Additionally you must:
- be able to demonstrate that you have a recovery plan in case of a system failure or loss of data; and
- maintain an audit trail between your electronic invoicing system(s) and the internal application system(s) that are used to process the electronic invoices. “
Seems pretty straightforward… So, if I am ever audited, what e-Invoicing method can I use that guarantees my company will not be penalised?
Well, I can think of two… EDI and electronic signatures…
OK, so I am being facetious an perhaps a bit too hard on HMRC as their intentions are honourable, but by removing the two most commonly used methods from the rules, even as examples, they have described less tangible evidence as to what constitutes authenticity and integrity.
Section 4.8 of the existing UK rules already referenced HMRC’s desire to not be too overly prescriptive and a preference for ‘good business practice or businesses’ own controls’, so unfortunately, without providing examples of solutions such as EDI that do provide compliance, how are companies ever going to be 100% sure?
It seems to me the new changes clarify the UK rules to the point of translucence…
…and just to add insult to injury, section 2 of article 233 of the new EU directive states;
2. Other than by way of the type of business controls described in paragraph 1, the following are examples of technologies that ensure the authenticity of the origin and the integrity of the content of an electronic invoice:
(a) an advanced electronic signature within the meaning of point (2) of Article 2 of Directive 1999/93/EC of the European Parliament and of the Council of 13 December 1999 on a Community framework for electronic signatures*, based on a qualified certificate and created by a secure signature creation device, within the meaning of points (6) and (10) of Article 2 of Directive 1999/93/EC;
(b) electronic data interchange (EDI), as defined in Article 2 of Commission Recommendation 1994/820/EC of 19 October 1994 relating to the legal aspects of electronic data interchange, where the agreement relating to the exchange provides for the use of procedures guaranteeing the authenticity of the origin and integrity of the data.