ERA Forum (2011) 12:253–263DOI 10.1007/s12027-011-0215-y

A RT I C L E

Simplified VAT invoicing requirements and electronicinvoicing

Ingo Schlegel

Published online: 19 May 2011© ERA 2011

Abstract Today, the adoption rates of e-invoices are relatively low and vary widelyamong Member States. Furthermore, businesses often struggle with the general re-quirements to issue an invoice, the content requirements as well as the requirementsfor invoice correction in particular when involved in cross border transactions af-fecting different legislations in numerous Member States. The Council Directive2010/45/EU has introduced changes regarding the respective invoicing rules effec-tive as of 01 January 2013 in order to resolve these problems incurred by businesses.In particular the establishment of the “Principle of Equal Treatment” is deemed to besuited to remove existing barriers and hurdles for the use of e-invoicing.

Keywords E-invoicing · VAT invoice · Invoice requirements · Invoice Directive2010 · Invoicing simplifications

1 Introduction

Based on the Council Directive 2010/45/EU (“Invoice Directive 2010”), the Mem-ber States have to implement important changes with regard to the invoicing rulesby 01 January 2013. These changes concern the four principle invoicing areas whichare the requirement to issue an invoice, the content of an invoice, electronic invoicingand the archiving requirements. In the following, a summary of the relevance of these

This paper is based on a presentation given at the Annual Conference on European VAT Law 2010,organised by ERA on 25–26 May 2010 in Trier.

I. Schlegel, Attorney at law (�)General Electric, Corporate VAT Manager Germany, Kirschbluetenweg 10, 53639 Koenigswinter,Germanye-mail: ingo.schlegel@ge.com

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areas to businesses as well as the scope of the changes due to the Invoicing Directive2010 is provided.

2 Historic development

With effect of 01 January 2001, the Directive 2001/115/EC (“Invoice Directive”) wasadopted with the aim to simplify, harmonize and modernize the situation regardingVAT invoicing. This initially separate Directive was then incorporated into the Coun-cil Directive 2006/112/EC (“Recast Directive”) on 01 January 2007. Article 237 ofthe Recast Directive requires that “the Commission shall present, at the latest on 31December 2008, a report and, if appropriate, a proposal amending the conditionsapplicable to electronic invoicing in order to take account of future technologicaldevelopments in that field.”

In December 2006, an industry Task Force on e-Invoicing was formed, which waschaired by the Commission, and included enterprises, representatives of banks andother service providers, as well as various organizations. The Task Force formulatedproposals for a roadmap for an e-Invoicing Program. Based on this the Commis-sion decided to set up an Expert Group on e-Invoicing.1 The group was mandated topropose a European e-Invoicing Framework supporting the provision of e-invoicingservices in an open and interoperable manner across Europe. The Export Group deliv-ered its final report in November 2009.2 This report has been opened to consultationby the Commission until 26 February 2010.3

Apart from this, an independent study was tendered by the Commission in orderto provide an objective analysis of the current situation in practice. The overall ob-jective of this study was to review whether, for the four principal areas of invoicing,improvements can be made to the legislation with the aim of further harmonizing andmodernizing those rules in order to reduce the burdens on business and stimulate theuse of electronic invoicing. The four principal invoicing areas are:

• the requirement to issue an invoice, including self-billing and outsourcing (Articles220 to 225 of the Recast Directive);

• the content of an invoice (Articles 226 to 231 and Article 238 of the Recast Direc-tive);

• electronic invoicing (Articles 232 to 236 of the Recast Directive);• the storage (archiving) of invoices (Articles 244 to 249 of the Recast Directive).

This study was performed by PricewaterhouseCoopers (PwC) in three mainphases:4 First, information was gathered on national legislation and a survey was con-ducted amongst businesses on the use of e-invoicing and e-archiving. In the secondphase, the information received was analyzed with regard to the difficulties businesses

1http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2007:289:0038:0044:EN:PDF2http://ec.europa.eu/enterprise/sectors/ict/files/finalreport_en.pdf3http://einvoicegw.campus02.at/upload/upload/119_consultation_en.pdf4See final report dated 03 November 2008—http://www.slideshare.net/FrisodeJong/pwc-study-invoicing-directive-vat-final-report-presentation.

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face in the four main areas of invoicing. Finally, recommendations were formulatedwith respect to these four areas.

Based on input received from businesses and national tax authorities, the studycame to the conclusion that the different options provided in the Recast Directivecause the biggest burden, especially in cross border situations since this means thatbusinesses might have to comply with different requirements for the same transaction.

Based on the recommendations, on 04 February 2009 the Commission publisheda first proposal for a directive amending the Recast Directive (“Directive Proposal”).5

Finally, the “COUNCIL DIRECTIVE 2010/45/EU of 13 July 2010 amending Direc-tive 2006/112/EC on the common system of value added tax as regards the rules oninvoicing” was published.6 The Member States now have to adopt and publish re-spective national laws and regulations necessary to comply with this Directive by 31December 2012.

3 Relevance of VAT invoice

Under Article 178(a) of the Recast Directive, the exercise of the right of deductionof the VAT due or paid in a Member State in respect of supplies to him of goods orservices is subject to the condition that an invoice is held. In accordance with Article220 of the Recast Directive an invoice must thus be issued for every supply of goodsor services which a taxable person makes on behalf of another taxable person.

However, apart from this, the invoice is also a critical element in order to meetVAT documentation requirements of the taxable person. Based upon Article 242 ofthe Recast Directive, every taxable person shall keep accounts in sufficient detail forVAT to be applied and its application checked by the tax authorities. The invoicedocument may be an essential part in this, for example when respective informationis not entered into the ERP system at the recipient (e.g. description of underlyingsupply).

Finally, the national tax authorities consider the VAT invoice requirements as es-sential for control purposes since these provisions allow them to audit the correctnessof the VAT paid and deducted by the business.

4 Invoice requirements

With Article 226 of the Recast Directive the invoice details which are required forVAT purposes on invoices to be issued pursuant to Articles 220 and 221 are defined.However, Member States have been granted options with regard to invoicing require-ments for derogation. However, businesses face problems where Member States ex-ercise these options as the resulting special invoice requirements, generally, cannotbe dealt with by standard set-ups of ERP systems.

5http://www.e-invoice-gateway.net/upload/upload/86_com_2009_21_en.pdf6http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=OJ:L:2010:189:0001:0008:EN:PDF

256 I. Schlegel

Based upon a survey conducted by BusinessEurope in 2008, the following par-ticularly burdensome invoice requirements existed in the different Member States in2008:7

• Separate set of sequential invoice numbers• Requirement to issue invoices in local language• Requirement of signature on paper invoices• Expression of amounts in words• Amounts to be expressed in local currency• VAT IDs of customers for domestic sales• Very short time limits for issuing invoices• Restrictions on self-billing

These invoice requirements turn out to be even more of a problem in case of crossborder supplies where the jurisdiction of more than one Member State is affected. Ithas to be determined which rules apply and potentially different invoice requirementsin various Member States must be implemented in one single ERP system often re-quiring manual intervention as the existing invoicing system is not able to deal withthe issue.

Even if the invoice rules applicable have been identified, the application of theseto a specific supply can turn out to be difficult. According to the survey of Busi-nessEurope, 50 percent of the participants encounter different invoicing requirementsin other Member States. The cost of adapting to these requirements is considerable.

With regard to this, in particular the following groups of problems occur in prac-tice:

Incorrect information—one element of the required data for the invoice may notbe determined correctly. For example, with regard to the description of the recipient,the full name and legal title of the recipient of the supply is required. However, basedupon obsolete or incorrect data in the ERP system, a different name or address maybe shown on the invoice.

Missing information—the required individual invoice element may be missing al-together (e.g. the invoice only mentions the date when the invoice is issued but thereis no further indication to the date when the supply is provided).

4.1 Simplification rules

In order to reduce burdens on business, the Recast Directive allows Member Statesto release taxable persons from the requirement to issue invoices for certain exemptsupplies.8

Furthermore, based on Article 238 of the Recast Directive, Member States may—after consultation—provide that in the following cases some of the mandatory infor-mation required need not to be entered on invoices in respect of supplies of goods orservices in their territory:

7http://www.tax.org.uk/OneStopCMS/Core/CrawlerResourceServer.aspx?resource=fca4ddc2354a4af28d7c64d9dc0d1256&mode=link&guid=3e6d4c6504a3481cbeeeb4f36886608a8See Art 221 (2).

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• Where the amount of the invoice is minor• Where the commercial or administrative practice in the business sector concerned

or the technical conditions make it difficult to comply with the obligations

Member States vary in their approach to these options: some make full use of it,others apply it restrictively and others, until now, have not applied it at all.9

4.2 Changes due to Invoicing Directive 2010 (effective from 01 January 2013)

With the Invoicing Directive 2010 the Commission aims to simplify VAT invoicingrules as well as provide legal certainty for businesses regarding their invoicing obli-gations. This will enable businesses to reduce costs and be more competitive and toimprove the functioning of the internal market. With regard to this, the followingchanges have been implemented:

4.2.1 Changes to the issuance of an invoice (Articles 220 to 235)

The issue of an invoice shall not be required in respect of services exempted un-der Article 135 (1) points (a) to (g) of the Recast Directive (these are insurance andfinance services). Apart from this, also certain simplifications for minor amount in-voices have been made mandatory. For invoices up to €100, these simplificationsare to be implemented in all Member States. For invoice amounts between €100 and€400, voluntary simplifications will still be possible.

A harmonized (mandatory) time limit for the issue of the invoices for B2B intra-community supplies of goods and services with reverse charge is implemented. Basedon this, the invoice shall be issued no later than the fifteenth day of the month follow-ing that in which the chargeable event occurs. For other supplies of goods or servicesMember States may impose time limits on taxable persons for the issue of the invoice.

4.2.2 Allocation of applicable rules (Article 219a)

The problem with regard to the applicable law in case of cross border transactionshas been addressed. Based on Art. 219a, invoicing will now be subject to the rulesapplying in the Member State in which supply is deemed to be made. However, thereare substantial exemptions from this rule.

Invoicing shall be subject to the rules applying in the Member State in which thesupplier has established his business or has a fixed establishment from which thesupply is made in the following cases:

(a) The Supplier is not established in the Member State in which the supply of goodsor services is deemed to be made or his establishment in that Member State doesnot intervene in the supply and recipient is obliged to account for the local VATdue. However where the customer issues the invoice (self-billing), the generalrule will again apply.

(b) The underlying supply of goods or services is deemed not to be made within theCommunity.

9For details see PwC study—FN 4.

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4.3 Consequences of incorrect invoicing

Non-compliance with the invoicing rules creates risks for both parties involved in thetransaction.

For the recipient, the right for input VAT recovery regarding any VAT amountshown on the invoice is at stake. Based on the decision of the Court of Justice of theEuropean Union (ECJ) in 1989 (“Genius Holding”),10 the taxpayer only can claimthe right for input VAT deduction for correctly invoiced VAT. This means that if theissuer has incorrectly charged VAT on the invoice, the recipient is not entitled torecoverable this VAT from the tax authorities even if he pays the respective amountto the issuer.

Furthermore, even if the VAT treatment of the underlying transaction is correctlytransferred on the invoice, the recipient may still fail with the reclaim of the VAT ifany of the mandatory invoice elements are not displayed correctly.

In case the issued invoice is not in line with the respective legal invoice require-ments, the recipient must therefore refer back to the supplier in order to have theinvoice corrected accordingly. In particular, to the extent that he has already paid theinvoice, he might even be forced to take legal steps against the issuer for the correc-tion of the invoice if the issuer refuses to do so. Such claims might however be subjectto contradicting time limits than the ones for the invoice correction procedure.11

For the issuer of the invoice, there is in turn a risk of a separate liability regardingincorrectly invoiced VAT based on Article 203 of the Recast Directive. This meansthat in case he shows VAT on the invoice despite the fact that there is no VAT due orthe VAT due is not to be shown on the invoice (e.g. because Reverse Charge Rulesapply), the issuer of the invoice owes this VAT to the authorities until the invoice iscorrected and the risk to the tax revenue is abolished.12

An incorrect invoice therefore must be corrected. The respective rules in the Mem-ber States may provide very specific requirements and formal procedures for this.However, the ECJ has established a very important hurdle with regard to the freedomof the Member States to decide on these procedural matters: The Member States mustrecognize the general EU principles. Therefore, the ECJ has rejected correction rules,which were only based on the possibility of waiving a tax claim and leaving the de-cision on this to the free decision of the tax authorities.13 Furthermore, the ECJ hasjust recently again clarified in a decision that a Member State may not define formalrequirements of the invoicing and correction at free will but that there are restrictionsfor this.14

10See ECJ dated 13.12.1989, C-342/87 “Genius Holding”.11See ECJ Referral “Banca Antoniana Popolare Veneta” (C-427/10).12See the following cases on the scope of this liability Case C-141/96 (Bernhard Langhorst); Case C-454/98 (Schmeink & Cofreth); Case C-78/02 (Marie Karageorgou).13See ECJ dated 19.09.2000, C-454/98 “Schmeink & Cofreth AG & Co. KG”.14ECJ dated 15 July 2010, C-368/09 “Pannon Gép Centrum Kft”.

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5 Electronic invoicing

According to respective market research, close to 900m B2B and 500m B2C invoiceshave been sent electronically in Europe during 2009.15 Methods of e-invoicing rangefrom bills simply sent by e-mail to consumers to fully integrated payment manage-ment systems.

The key benefits of e-invoicing include enhanced competitiveness, the potentialfor cost savings, improved cash flow, environmental benefits, more efficient supplychains, the liberation of resources for more productive work, and support for the de-velopment of the Single Market. Based on this, an e-invoice may be EUR 18 cheaperthan a paper-based bill.16

In the view of the Commission, the mass adoption of e-invoicing within the EUwould lead to significant economic benefits and it is estimated that moving frompaper to e-invoices will generate savings of around EUR 240 billion over a six-yearperiod.17

5.1 Current rules

Based upon Article 233 (1) of the Recast Directive, invoices sent or made available byelectronic means shall be accepted by Member States provided that the authenticityof the origin and the integrity of their content are guaranteed by one of the followingthree methods:

(a) By means of an advanced electronic signature within the meaning of the Elec-tronic Signature Directive (Directive 1999/93/EC)

Based on Article 2 of the Electronic Signature Directive, ‘electronic signature’means data in electronic form which are attached to or logically associated with otherelectronic data and which serve as a method of authentication;

In case of an ‘advanced electronic signature’, the electronic signature meets thefollowing requirements:

• it is uniquely linked to the signatory;• it is capable of identifying the signatory;• it is created using means that the signatory can maintain under his sole control; and• it is linked to the data to which it relates in such a manner that any subsequent

change of the data is detectable;

(b) By means of electronic data interchange (EDI) if the agreement relating to theexchange provides for the use of procedures guaranteeing the authenticity of theorigin and integrity of the data.

15http://www.dbresearch.com/PROD/DBR_INTERNET_EN-PROD/PROD0000000000245196.pdf16See dbresearch—FN 15.17COMMUNICATION FROM THE COMMISSION “Reaping the benefits of electronic invoicing forEurope”. http://eur-lex.europa.eu/LexUriServ/LexUriServ.do?uri=COM:2010:0712:FIN:EN:PDF.

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Electronic data interchange (EDI) is the computer-to-computer interchange ofstrictly formatted messages that represent documents other than monetary instru-ments. EDI implies a sequence of messages between two parties, either of whommay serve as originator or recipient. The formatted data representing the documentsmay be transmitted from originator to recipient via telecommunications or physicallytransported on electronic storage media. In EDI, the usual processing of receivedmessages is by computer only. Human intervention in the processing of a receivedmessage is typically intended only for error conditions, for quality review, and forspecial situations.18

(c) Invoices may be sent or made available by other electronic means, subject toacceptance by the Member States concerned.

This “third way” is not focused on defining a specific technology requirement fortransfer of electronic invoice. Instead, the focus is on the responsibility of the tradingparties to ensure authenticity and integrity of invoice during transfer with suitablemeans.

For example, in the United Kingdom, the scope of the internal controls is definedby the national tax authorities as follows:19

• Control over completeness and accuracy of invoice data• Timeliness of processing• Prevention or detection of possible corruption of data• Prevention of duplication of processing at recipient• Prevention of automatic processing where no VAT is recoverable• Recovery plan to avoid loss of data• Maintain audit trail—ERP system archives audit trail from order to supply to in-

voice to payment

5.2 Practical problems

While e-invoicing is already an accepted and growing practice, there are, however,a number of barriers standing in the way of wider adoption especially by smallerbusinesses and particularly when it comes to intra-European e-invoicing. The publicconsultation on the final report of the expert group on e-invoicing reconfirmed thatVAT is the main legal barrier to the uptake of electronic invoicing.20

The implementation of the three methods has so far not been consistent throughoutthe various Member States and this has created high burden for businesses. Addition-ally, each Member State has its own standards and views on how data integrity andauthenticity have to be guaranteed. In many cases, businesses will still issue a pa-per invoice in parallel when using electronic invoicing in order to ensure that legalrequirements are met.

18http://en.wikipedia.org/wiki/Electronic_Data_Interchange19See Notice 700/63 (June 2007) under Sects. 4.8 and 4.9. http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageVAT_ShowContent&propertyType=document&id=HMCE_PROD_010205.20http://ec.europa.eu/internal_market/payments/docs/einvoicing/summary_report_en.pdf

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The method of advanced electronic signature and EDI establish the above de-scribed technology based requirements instead of relating to technical VAT aspects.In practice, verifying these requirements has turned out to be quite difficult bothwithin businesses and national authorities.

5.3 Changes based on the Invoicing Directive 2010 (effective from 01 January2013)

The central element with regard to the changes on e-invoicing rules was the imple-mentation of the principle of Equal Treatment between paper and e-invoices. Thiswas done as follows:

The current pre-defined technology solutions for e-invoicing in Article 233 (EDIand e-signatures) are abolished.

Instead, all types of e-invoicing will generally be accepted going forward. Arti-cle 233 No. 1 instead defines the requirement that “the authenticity of the origin, theintegrity of the content and the legibility of an invoice shall be ensured from the pointin time of issue until the end of the period for storage of the invoice”. This require-ment applies equally to paper invoices as well as electronic invoices. Each taxableperson shall determine the way to ensure the authenticity of the origin, the integrityof the content and the legibility of the invoice. This may be achieved by any businesscontrols which create a reliable audit trail between an invoice and a supply of goodsor services.

The current e-invoicing methods of EDI and e-signatures are now defined as ex-amples of technologies that ensure the authenticity of the origin and the integrity ofthe content of an electronic invoice. This means that those businesses that have al-ready implemented e-invoicing processes according to these requirements or intendto do so going forward, do not have to check their process with regard to whetherthe authenticity of the origin and the integrity of the content and the legibility of theinvoice is ensured as this requirement is deemed to be met by law.

6 Electronic archiving

Based upon Article 244 of the Recast Directive, every taxable person shall ensure thatcopies of the invoices issued by himself, or by his customer or, in his name and onhis behalf, by a third party, and all the invoices which he has received, are stored.21

6.1 Current rules

Today, the Recast Directive grants businesses a general freedom of choice to definethe place of storage of invoices provided the invoices or mandatory information to bestored is made available to the competent authorities without undue delay wheneverthey so request.

21This obviously only defined the archiving obligations based on the VAT directive with regard to theinvoices. Apart from this, further documents may have to be archived in order to meet documentationrequirements for VAT purposes or other general tax documentation requirements.

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However, the Member States currently have the option to alter and restrict thischoice as follows:

Based on Article 245 (2) of the Recast Directive, Member States may requiretaxable persons established in their territory to notify them of the place of storage, ifit is outside their territory as well as require them to store invoices within that territorywhen the storage is not by electronic means guaranteeing full on-line access to thedata concerned.

The Member States may also require that invoices be stored in the original formin which they were sent or made available, whether paper or electronic. Additionally,in the case of invoices stored by electronic means, it may be required that the dataguaranteeing the authenticity of the origin of the invoices and the integrity of theircontent is also to be stored.

Finally, the Member States may restrict or prohibit storage of invoices in non EUMember States altogether.

Most Member States have implemented these options since they believe it ensuresefficient access to the invoices stored.

The Recast Directive does currently not mandate a specific storage period. EachMember State has determined individually the period throughout which taxable per-sons must ensure the storage of invoices relating to the supply of goods or servicesin its territory and invoices received by taxable persons established in its territory.In most Member States, the storage period for VAT purposes for items other thanpurchases of capital goods varies between 5 and 7 years.22

With regard to invoices which are issued in another than the national language,currently, for control purposes, Member States may require invoices in respect ofsupplies of goods or services in their territory and invoices received by taxable per-sons established in their territory to be translated into their national languages.

6.2 Changes based on Invoicing Directive 2010 (effective from 01 January 2013)

6.2.1 Place of storage

The Directive Proposal intended to delete the respective provision so that storagewould no longer be subject to any restrictions or notification requirement. Instead,the taxable person was to decide the place of storage of all invoices provided thathe makes the invoices or further mandatory information available to the competentauthorities without undue delay whenever they so request. This was also in line withthe recommendations given by PwC in their final report.23 However, this proposalwas not implemented.

6.2.2 Electronic storage

In was intended in the Proposal Directive to allow that paper invoices could alsogenerally to be stored in electronic form. However, this proposal was also not imple-mented.

22See final report from PwC study, Sect. 4.2.23See final report from PwC study, Sect. 4.1.

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6.2.3 Storage period

The harmonization of the storage period at 6 years was included in original proposalbut was not adopted. So, the storage period remains subject to free decision by Mem-ber States.

6.2.4 Translation of invoices

The proposal intended to restrict this requirement so that for control purposes, theMember States in which the tax is due may only require particular invoices to betranslated into their official languages.

The wording of Article 248a has been altered from the proposal in the final ver-sion: “For control purposes, and as regards invoices in respect of supplies of goodsor services supplied in their territory and invoices received by taxable persons estab-lished in their territory, Member States may, for certain taxable persons or certaincases, require translation into their official languages. Member States may, however,not impose a general requirement that invoices be translated.”

6.2.5 Allocation of applicable rules/data access

For control purposes, where a taxable person stores, by electronic means guarantee-ing online access to the data concerned, invoices which he issues or receives, thecompetent authorities of the Member State in which he is established and, where theVAT is due in another Member State, the competent authorities of that Member State,shall have the right to access, download and use those invoices.

So far, in case of cross border supplies, the Member State of supplier could checkinvoices of supplier and Member State of customer could check invoices received bythe customer, however the cross check of this data is currently not intended. Basedon the new rules, the Member State where the VAT is due will also have access tothe invoice stored by the supplier and will therefore be able to perform cross-checksbetween invoice stored by supplier and invoice stored by customer. However, it is stillunclear how this right to access is to be realized in practice.

7 Conclusion

The Invoicing Directive 2010 provides the grounds for a substantial simplification inthe area of e-invoicing. This is a major step with regard to the Commission’s politicalobjective to see e-invoicing become the predominant method of invoicing by 2020in Europe. The necessary changes regarding e-invoicing, however, also have to beseen in the overall context of the invoicing requirements. Now, a fast and reliableimplementation of the changes by the Member States is critical. However, also furtherdedicated discussions must continue on which rules have still to be further simplifiedwith a view to improving the functioning of the internal market.