Value Added Tax (VAT) is a fundamental aspect of foreign exchange and business transactions all over the world, especially in the EU and the UK. As we move into 2024, VAT laws are still changing, governments are advancing the tax system, and digitalization, and reporting requirements are on the rise. The private sector needs to continue engaging and enforcing the law to make appropriate adjustments to its VAT policy for cash management.

In this update, readers will find the new changes in VAT legislation, various approaches, tips for completing the VAT return in 2024, and the focus on the digitalization of taxes.

The Changing VAT Landscape in 2024

VAT regulations are constantly evolving as governments implement new laws to tackle tax fraud and improve the accuracy of collections. As of 2024, there are several significant changes and trends that businesses need to be aware of:

Digitalization and Real-Time Reporting

One of the most notable trends in recent years is the digitalization of VAT reporting. In many countries, including the UK, digital tax platforms such as the Making Tax Digital (MTD) initiative are becoming mandatory. The MTD initiative requires businesses to use suitable software for filing VAT returns so that return filing is real-time and free from mistakes.

In 2024, the UK’s MTD program has expanded, and almost all companies working with VAT are already following this program.  Other countries in Europe, such as Italy and Spain have also put in place similar digital reportage systems that require VAT filing at real-time or near-real-time.

Implication for Businesses: Businesses must invest in the right digital tools and software to comply with these regulations. This transition can be costly, especially for smaller businesses, but failure to comply can result in penalties.

Extended VAT Registration Requirements for Online Sellers

E-commerce continues to grow, and so do the VAT implications for online sellers, especially those selling across borders. In 2021, the EU launched the One-Stop-Shop (OSS) system for the integrated VAT return for cross-border sales of goods and electronically supplied services to consumers in different EU member states. However, up to 2024, these rules have been advanced to make the easy for business organizations, and at the same time, those who are not conversant with the new rules will be faced with high reporting problems.

Key Update: Non-EU businesses selling into the EU, including those based in the UK post-Brexit, must register for VAT in an EU country via the OSS scheme. This allows them to report all EU sales under one VAT return. Without this, businesses face the risk of VAT liabilities in multiple countries.

Brexit-Related VAT Changes

Due to Brexit, VAT regulation between the UK and the EU has been in a state of constantly evolving. In 2024, VAT on imported and exported goods between the UK and the EU continues to remain a focus for business. For example, goods imported into the UK from the EU are now chargeable to Import VAT but businesses can use the Postponed VAT Accounting (PVA) system to pay VAT after the importation.

Practical Advice: Businesses trading internationally must stay updated on post-Brexit VAT rules, including the PVA system, and incorporate these into their VAT planning to avoid cash flow issues.  

Emergence of New Tax Fraud Schemes

As VAT systems evolve, so too do fraud attempts. VAT carousel fraud (also known as missing trader fraud)  is still a major problem in the area of value-added tax throughout European countries. There is evidence of rising activity by governments to combat VAT fraud by working on enhancing the sharing of information between tax authorities and companies and enhancing compliance with VAT returns.

Implication for Businesses: Businesses must ensure they have robust internal controls and documentation in place to avoid being caught up in fraudulent schemes, which could lead to audits or penalties.

Key Areas of Focus for VAT Planning in 2024

VAT planning is valuable to help businesses minimize tax burden and avoid non-compliance with arising complexities. In 2024, several key areas demand attention in VAT planning:

Automating VAT Processe

With the push for digital reporting, the VAT must be automatized wherever possible. From the calculation of VAT right up to the submission of returns, automation reduces the probability of errors and allows real-time reporting. There is a growing trend in organizations to use online accounting tools that handle VAT, thus allowing the tracking of VAT at various locations.

Optimizing Cash Flow with Postponed VAT Accounting

Import VAT can strain cash flow, especially for businesses that import large volumes of goods from the EU or other regions. The UK’s Postponed VAT Accounting scheme allows businesses to account for Import VAT on their VAT return, instead of paying it immediately when goods enter the UK. This option remains essential for cash flow management in 2024, particularly for businesses heavily reliant on imports.

Checking Supply Chain to Optimize VAT

As supply chains evolve, especially in the wake of Brexit and global economic disruptions, businesses must review their supply chains to ensure VAT efficiency. Structuring transactions to minimize VAT liabilities, such as taking advantage of customs reliefs or zero-rated supplies, can significantly impact a business’s bottom line.

Cross-Border VAT Registration

For businesses operating internationally, understanding where VAT registration is required is crucial. Countries like Germany, France, and Italy have specific requirements for businesses selling goods or services to their consumers. Ensuring that a business is VAT-registered in all necessary jurisdictions is a key part of VAT planning in 2024.

Sector-Specific VAT Considerations

Certain industries face unique VAT challenges. For example, the construction industry in the UK must navigate the Domestic Reverse Charge mechanism, while digital service providers must ensure compliance with VAT on electronic services. In 2024, businesses in these sectors need to stay informed of industry-specific VAT rules.

Best Practices for Filing VAT Returns in 2024

Accurate VAT return filing is essential to avoid penalties and ensure compliance. As VAT rules continue to evolve, businesses must adopt best practices to streamline their VAT return filings:

Use MTD-Compatible Software

Now, more and more UK businesses can get into the Making Tax Digital system; they should make sure that they use software compatible with MTD when submitting their VAT returns. It is impossible in 2024 to possibly calculate VAT manually, and companies that do not follow MTD must face penalties.

Maintain Detailed Records

Digitalization does not replace the need for detailed record-keeping. Businesses must retain records of all VAT invoices, receipts, and transactions to support their VAT filings. These records should be organized and accessible in case of an audit.

Review VAT Rate frequently

Rules and rates of VAT change more frequently particularly those that affect cross-border sales. Businesses should do a periodic check on their VAT account balance and compare it to the current regulations to avoid making unhappy surprises arising from either over or underpayment of VAT.

File on Time to Avoid Penalties

Late VAT return filings continue to incur penalties. As tax authorities improve their digital reporting systems, they are becoming stricter with enforcing deadlines. Every company must establish a schedule and have proper procedures to complete the returns on time.

Conclusion

VAT planning and return filings will become more challenging and digitalized in 2024 when governments focus on real-time reporting of VAT data, compliance with cross-border VAT rules, and combating fraud. With digital methods and tools, keeping up with regulatory changes, and refining VAT strategies, businesses can stay compliant while optimizing their VAT management.

For companies operating in the UK and internationally, the need for up-to-date VAT knowledge and a proactive approach to compliance is more important than ever. As the tax landscape evolves, so too must your approach to VAT.

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