How e-invoicing connects tax administration and payments

E-invoicing is transforming financial operations, enhancing efficiency, compliance, and fraud prevention while shaping the future of digital tax systems.

E-invoicing is rapidly transforming financial operations by automating invoicing from generation to payment. Unlike basic digital representations, structured formats like XML allow seamless automation, boosting efficiency and compliance. With 16 billion B2B invoices processed annually in Europe, the shift to e-invoicing is not just an upgrade—it’s a necessity.

This naturally fosters better collaboration between businesses, tax administrations and the payment industry, paving the way for a more integrated and efficient financial ecosystem. Since e-voicing represents 22% of all payment transactions, it presents a significant opportunity for collaboration between businesses, tax administrations, and the payments industry.

The general benefits of e-invoicing include numerous opportunities to streamline financial operations and enhance overall efficiency:

1. Reduction of manual data entry and errors: E-invoicing automates the invoicing process, reducing the need for manual data entry. This minimises the scope for human error, leading to more accurate and reliable transaction records.
2. Enhanced compliance: E-invoicing systems embed domestic and international financial reporting standards, ensuring better compliance with regulatory requirements. This is particularly important for payment providers who must adhere to compliance mandates.
3. Reduced administrative burden and environmental impact: By enabling interoperability across accounting systems and ecosystems, e-invoicing reduces the administrative burden and the environmental impact associated with other models.
4. Improved cash flow management: Faster processing and settlement of invoices lead to improved cash flow management. Payment providers benefit from quicker payments, which enhances their liquidity and operational efficiency.
5. Enhanced data security: Including advanced security features such as encryption and secure access control ensures that sensitive financial information is protected from unauthorised access and cyber threats, providing peace of mind for both business and customers

There are also many specific payment industry benefits from structured data formats and enhanced management capabilities:

1. Enhanced data accuracy: Structured data formats reduce the likelihood of errors during data entry and processing. This leads to more accurate transaction records, minimising disputes and chargebacks.
2. Improved compliance: Structured data makes it easier to comply with regulatory requirements, such as anti-money laundering (AML) and know-your-customer (KYC) regulations. This helps merchant acquirers avoid penalties and maintain good standing with regulatory bodies.
3. Better fraud detection: With better data, payment service providers can implement more sophisticated fraud detection algorithms. This enhances their ability to identify and prevent fraudulent transactions, protecting both the provider and their clients. This is particularly pertinent in the context of authorised push payment (APP) fraud.
4. Enhanced reporting and analytics: Structured data provides a rich source of information for reporting and analytics. Payment service providers can gain valuable insights into transaction patterns, customer behaviour, and operational performance, helping them make data-driven decisions.

E-invoicing will become increasingly crucial for the payments industry, and its policy voice, The Payment Association (TPA), will rightly seek to be influential in the UK government consultation announced in the 2024 Budget, due to be published in early 2025.

This consultation aims to establish standards for the adoption of electronic invoicing within the UK as part of a broader effort to create a digital VAT system that is more efficient and secure. Additionally, it strongly aligns with the OECD Tax Administration 3.0 vision, which envisions a more federated and automated tax administration system.

Tax administration obligations

Fiscal authorities are interested in e-invoicing as a step toward implementing Continuous Transaction Controls, which enables them to collect data directly from business activities in real or near real-time. This data collection enhances transparency and compliance, benefiting both the authorities and the payment industry. It is also a key feature of Tax Administration 3.0 to push more tax obligation processes and rules into the systems where economic activity is performed.

Beyond compliance, e-invoicing reduces administrative burdens by streamlining invoicing and reducing manual intervention. This saves time, cuts costs, and allows businesses to focus on growth and innovation.

Conclusion

E-invoicing is a key policy topic for the payment industry, offering immediate benefits of improved efficiency, reduced costs, and enhanced compliance. It also aligns with the OECD Tax Administration 3.0 vision and could be a significant step in future-proofing the industry against more widely evolving tax policies grounded in this vision. This is a critical point, given the potential resurgence of the VAT split payments concept, where HMRC has already explored collaboration with the payments industry.

Additionally, Tax Administration 3.0 is gaining momentum and will rely on sophisticated data structures and evolving digital transactions to power a more efficient and transparent financial ecosystem. Therefore, it is in the best interest of the payments industry and the UK Government to collaborate closely on this broader topic, ensuring a seamless transition to a more integrated and automated tax administration system.

Industry participation in the upcoming consultation is crucial. Engaging now will help shape practical policies and ensure smoother adoption of future regulations, including VAT split payment.