Electronic invoicing: Are you already working on it?
Recently I was asked to give a presentation on electronic invoicing. This was during a meeting for credit managers. As a VAT practitioner, you have to switch gears a bit to make sure that the main points of interest get across without it becoming a boring story. If the feedback is to be believed, it certainly did that.*
Btw is fun!
Taxes, by definition, are no fun. Nobody enjoys paying them, you always pay too much, and usually you don't see a (direct) result of your individual contribution to the cost of society. Sure, we use roads, schools and healthcare, and we can walk the streets safely. But apart from that, tax money is never well spent on those things you yourself would like to spend it on.
But if you do something with taxes, choose VAT. VAT is charged on every transaction. As a result, you encounter VAT everywhere. And as a result, thanks to VAT, you also find yourself in very factual and sometimes special and unusual situations and environments that you would never have to deal with as an "ordinary" tax professional or accountant.
As a consumer, of course you know VAT when you buy something. But as an entrepreneur, you deal with VAT on a daily basis. And not only as a tax specialist or in the finance department, but also, or especially, in the AP department, credit management, logistics, commerce and very often in IT.
Invoices are crucial
And that's where the invoice comes in. For every transaction, the supplier is required to issue a VAT invoice. This invoice must meet a number of minimum requirements. These requirements are contained in the European VAT Directive and each EU member state must apply and accept these requirements.
Of course, in addition to the VAT invoice requirements, there are other legal provisions that dictate what information must appear on an invoice. Think of the Chamber of Commerce number. However, these obligations may differ from one EU member state to another. For example, in Germany, the name or names of the management must appear on the invoice.
That's not all. Because in addition to the legal provisions, there are often agreements between supplier and buyer. For example, buyers often request that a PO number be included on the invoice, or the name of a department or contact person. Specific references to the contract or agreement, or certain item descriptions may also be requested. Sometimes this is also agreed upon or customary within a particular industry.
Finally, there are always certain details that you, as a supplier, actually always want to put on the invoice. For example, the bank account number where payment can be made, and the payment term. And if, with my VAT glasses on, you really want to do it right, you always put the country and address of departure and arrival of the goods and the delivery conditions used on the invoice, and preferably also the tax code used. Pretty handy if you want to make and check the VAT return.
Of all times
In fact, the function of the invoice has always remained the same, namely, proof that a transaction has taken place and that payment is due for the supply of goods or services.
Invoicing has been around for thousands of years and was already used in ancient Greece, Egypt and Mesopotamia. The oldest known invoice was found in Egypt: a document on papyrus from about 3,000 BC. That was an invoice for the delivery of beer and bread for a construction project (not, not for the building of a Pyramid).
The ancient Romans also used invoices in their trading activities, with examples dating back to 100 BC. These were primarily handwritten papyrus documents and included details such as the names of the supplier and buyer, a description of the goods or services and the price.
Over time, the method of invoicing did change. Whereas in Egypt and Rome clay tablets and papyrus were used, today almost no paper invoice can be found. And the next step is electronic invoices.
The ABCs of invoicing
A handwritten piece of paper, with or without VAT stamps attached, was used as an invoice until late last century. Analog, so basically the opposite of digital. A pen and paper, a stamp and maybe a multi-binder was all you needed to create, send and keep an invoice.
With the advent of modern tools such as the typewriter, invoices could be created in a more uniform, and often more legible, manner. However, these Basic Invoices were still sent by mail the old-fashioned way and kept in filing cabinets full of folders in the basements of many companies.
With the advent of the Computerand printers, as well as the fax and copier, billing became altogether easier. Data could be reused multiple times, filing cabinets gave way to floppies, and faster shipping and receiving meant invoices were also processed and paid faster.
Today, most paper has been replaced by the Digital versions: a pdf file, or photos and pictures of invoices are exchanged by email. Tax authorities are also already fully accustomed to digitization and, during their audits, no longer expect the stacks of folders with invoices, but a screen with access to the accounting or ERP system where all invoice data are stored.
And now the next step: the Electronic Invoice. The big difference with the digital version is that with an e-invoice, there are really only ones and zeros sent from sender to recipient. Actually, this eliminates the entire visualization of the invoice. You can still see on a computer screen what information is being exchanged, but printing or copying an invoice is no longer as simple.
Standing still is going backwards
The great advantage of electronic invoicing is that there is only one version of the invoice. When sending an invoice by email, there is always the possibility that the email is sent to multiple people and that invoices are duplicated in the records. With an e-invoice, the invoice is automatically recorded and everyone has access to the same data.
In addition, communication is a lot faster, and the sender also receives immediate feedback that the invoice has been received. No more discussions about invoices arriving late, not arriving or being lost. And credit notes or corrections follow the same path as the regular invoice.
Of course, there are also plenty of areas for improvement. For example, quite a few actions are still needed among entrepreneurs to adopt e-invoicing. Think of adjustments to accounting and ERP systems. But the processes preceding invoicing will also have to be adjusted. After all, where now invoicing may still take into account specific details of the transaction, the ideal e-invoice will merely be a "push-the-button" that follows from the previous processes. The master data, VAT logic and order details must therefore be entered and used correctly in one go, or the invoice will not be correct.
And apart from the fact that, as a result, the invoice is not sent and received, or is received too late, and may not be paid or not paid until later, it also causes problems with reporting the transactions to the tax authorities. But I'll get to that bit further in a future blog.
Want to know more?
Questions about electronic invoicing? Or any other VAT topic? Please feel free to contact us. Also, if you are interested in the related presentation (*), please let me know.
Bas de Koning is Partner at Less Grey. The Less Grey Group is specialised in VAT advice, compliance, and refunds. For more information and to book an appointment with one of our advisors, check our website: https://lessgrey.eu/en/