What is ViDA? VAT in the Digital Age explained

The European Union’s VAT in the Digital Age initiative, or ViDA, is a real game-changer for European business. In November 2024, EU member states approved the proposal that will radically change how VAT is managed across Europe. E-invoicing is at the heart of these upcoming changes and more and more EU countries are expected to make e-invoicing mandatory in the near future.

If you’re wondering “What is ViDA?” and why e-invoicing plays such a crucial part in it, you’ve come to the right place.

Why was ViDA created?

Before the ViDA initiative, businesses across the EU were struggling with complex VAT compliance requirements, especially when operating across multiple countries. The VAT system is outdated and ill-suited for modern business, with too many manual processes and too much room for fraudulent activities. Here are the main reasons why ViDA became so necessary and has been in the works for years:

• No standardisation across countries: Different rules and regulations in different EU countries make cross-border business unnecessarily complicated.

• The VAT gap: The EU countries lost around 99 billion euros in VAT revenues in 2020 alone, much of it due to VAT fraud, especially in cross-border business.

• Modern way of doing business: New business models, especially those utilising digital platforms, challenge traditional VAT rules and have contributed significantly to the VAT gap.

In short, ViDA was developed to modernise the VAT system and make it more transparent, efficient, and fair for businesses operating in the EU.

What is VAT in the Digital Age, or ViDA?

ViDA aims to give EU’s VAT framework a total overhaul and increase its transparency significantly. The mission is to ensure that businesses operating in the EU or selling to customers located in the EU pay VAT fairly. ViDA applies to all sales in the EU, meaning that businesses selling online to EU customers, regardless of their location (within or outside the EU), must comply. This also includes online marketplaces that facilitate such sales.

The key elements of ViDA include:

• Real-time digital reporting. Businesses will be required to report VAT transaction data in a digital format, in real time.

• Mandatory e-invoicing. E-invoicing will be required for all cross-border transactions between businesses.

• Updated VAT rules for platforms. Digital platforms will collect VAT on behalf of sellers, to ensure fair VAT collection also in the digital space.

• Simplified VAT registration. With a single point of registration for VAT, businesses can operate across Europe without needing to register in multiple places.

What is the role of e-invoicing in ViDA?

E-invoicing has a key role in the VAT in the Digital Age initiative, especially in achieving real-time digital reporting. E-invoicing is set to become mandatory step-by-step, meaning that businesses will be required to send and receive invoices electronically. E-invoicing offers a more secure and faster way to handle transactions:

• Automated VAT reporting: Sending and receiving invoices electronically means that VAT data is also submitted in real time.

• Less risk of fraud: E-invoices are harder to manipulate or falsify than other invoice formats; many e-invoicing solutions also offer built-in fraud detection.

• Increased efficiency: E-invoicing is the best way to remove manual tasks from invoicing.

• Built-in compliance: Each e-invoice leaves a digital record in the system it is sent or received in, so there’s less risk of missing or misreporting tax information.

Are you ready for the change?

ViDA is a necessary step toward creating a more transparent, efficient and fair tax system. Both businesses and business system providers will need to adapt in different ways to ensure compliance and take full advantage of the new legislation. For businesses, this means embracing e-invoicing and real-time VAT reporting to simplify processes and reduce errors. Software companies, on the other hand, have a unique opportunity to update their products and help businesses navigate these changes.