In December 2022, the EU Commission published its proposed new VAT framework, “VAT in the Digital Age”. If adopted by member states, all intra-EU cross-border b2b sales will be subject to mandatory e-invoicing and reporting, with phase-in possibly commencing as early as 2024.

This is part of a wider international trend: governments and tax authorities increasingly view digital invoicing (aka e-invoicing) as a way to close the tax gap caused by fraud and error, hence its steady but inevitable roll-out. Here’s a closer look at digital invoicing, and how businesses – especially companies involved in transactions in multiple territories – can become ‘e-invoicing ready’.

True digital invoicing is a system whereby invoices are issued, transmitted, received, processed and stored automatically in a structured format.

As an illustration of how this works, let’s say Company A is selling a batch of supplies to Company B:

• When the transaction is agreed, Company A’s AR software automatically generates an e-invoice and transmits this to the tax authorities who then send the invoice to Company B.
• On receipt, the invoice is logged automatically by Company B’s AP system. The invoice is also cross-referenced automatically against the original purchase order or other procurement documents.
• Assuming there is no discrepancy between the purchase order and the invoice, payment can be processed automatically.

The right digital invoicing solution ensures that all relevant information is captured and transmitted to the tax authority when the e-invoice is generated.

Digital invoicing depends on data being shared between different applications and systems. At different stages, the relevant information is read, captured, extracted and acted upon by those applications (notably, the buyer and seller’s accounts solutions), without the need for human input.

For this to happen, it is not sufficient to email a Word version or standard PDF of your invoice. This is where Structured Data Transmission (SDT) comes in: i.e. the transmission of data between systems in a standardised, machine-readable format.

XML (Extensible Markup Language) is the most versatile SDT format. Crucially, it allows programs to read and extract information from invoice fields. It’s efficient, secure and very widely used. This helps avoid any interoperability issues when you need to exchange details with other parties.

In the UK, digital invoicing is already mandatory for certain public sector transactions. With the steady march of HMRC’s ‘Making Tax Digital’ initiative, it is probably only a matter of time until it becomes mandatory across a much wider range of contracts, including B2B. We are also witnessing a gradual expansion of digital invoicing mandates across other key markets, including Italy, France, Spain and Germany.

Building up your e-invoicing capabilities at this stage helps keep you one step ahead of these requirements. Beyond compliance, there are some very clear business advantages to digital invoicing adoption, including a significantly reduced administrative burden, lower processing costs, faster payments, better control of cash flow, and stronger partner relationships. Discover more about the business advantages of digital invoicing here.

We know that mandatory digital invoicing is on its way, but the precise timetables for roll-out are still very much up in the air. In Europe, for instance, The EU Commission seems keen to bring about a certain level of harmonisation between Member States, but many of the tax authorities within those states already have their own initiatives underway, and we could very likely see a mish-mash of different systems and reporting procedures in play over the coming years.

The biggest risk – especially for businesses involved in cross-border transactions – is of sleepwalking into non-compliance, possibly opening the door to investigations, sanctions and reputational damage. Finance teams need to keep a close eye on the jurisdictions where the business is active to ensure invoicing and reporting procedures are aligned with any upcoming changes.

Risk mitigation involves building up an e-invoicing strategy that takes into account the markets in which you operate. Alongside this, you need to consider the expectations and preferences of your commercial partners. Crucially, your system of choice should make it possible to send and receive invoices in various formats, share information using multiple distribution channels and systems and maintain full compliance with the latest regulations, as and when those regulations come into force.