The modifications to the VAT Directive agreed in 2010 among EU Member States marks progress towards freedom of evidence for electronic invoicing, but the desire to move away from imposition of specific means to comply has led to language that, when taken out of context, can easily become misinformation. We are seeing some categories of advisers present the new rules that way. Here are some things that are incorrect to state in relation to the new VAT e-invoicing rules; effective from 1 January 2013:
1. “You must always be able to prove that a supply actually took place”
There is nothing in the VAT Directive that creates a requirement for taxable persons to prove that a supply actually took place. The Directive’s introductory remarks (“Recitals”) address the need for invoices to reflect an actual supply as an explanation of the need for requirements for integrity and authenticity – not to create an entirely new liability on taxable persons. Taxable persons are not required to use or store more formal documentation under the 2010 Directive than under the previous one.
2. “You don’t have to show integrity and authenticity of invoices if you can prove a supply took place”
You must always be able to prove the integrity and authenticity of invoices. If you can prove that a supply actually took place and the audit trail through which you prove this also –as a “side effect”– proves that every mandatory component of your invoice is real and unchanged since its issuance, then logically you have also demonstrated integrity and authenticity of the invoice. In other words you can have evidence that a supply took place but still not meet requirements to prove integrity and authenticity of invoices
3. “You must have internal controls that demonstrate the validity of invoices”
For countless legal and business reasons, all legitimate companies always have ways to control their debits and credits. A business that doesn’t will not survive for very long. However the VAT Directive does not create any new liability for businesses to be able to prove that they have any specific kind of internal controls. Businesses must keep books and records in a way that allows VAT to be assessed – this is by no means a requirement for businesses to comply with COSO or any other internal control or associated audit frameworks.
4. “You don’t have to show integrity and authenticity of invoices if you have adequate internal controls”
You must always prove the integrity and authenticity of invoices. The same arguments apply here as under point 2 above. Internal controls are only useful for e-invoicing compliance if they guarantee integrity and authenticity of invoices.
5. “You are compliant when you can show an order that matches an invoice”
Even if an order can be demonstrated to be reliable it will rarely constitute a sufficient audit trail demonstrating integrity and authenticity of invoices.
In addition to the above common misunderstandings, a new attitude appears to be taking root based on the consideration that under the 2010 Directive “you are off the hook if you comply and can leave your trading partners to worry about their compliance”. Legally this is “truer” under the new Directive than under the 2001 Directive. However there is a de facto interdependency between suppliers and buyers that can create a situation whereby larger trading partners must provide means that enable their smaller customers or suppliers to meet the VAT integrity and authenticity requirements. Ignoring the reduced capabilities that certain categories of trading partners will have to prove integrity and authenticity of invoices cannot be a good basis for a constructive business
relationship and might (particularly when a larger company imposes technical means or a service provider to create, receive or store electronic invoices for their smaller trading partners) create private law challenges.
Under the 2010 EU Directive you can demonstrate invoice integrity and authenticity without any specific form or process requirements. The simple rule for all businesses is: inventory the evidence you and your trading partners already produce and store from your normal business process, then decide on the most cost-effective way to supplement that evidence if it isn’t sufficient to prove integrity and authenticity of your invoices.