What Will New EU Laws Mean for Your E-invoicing Procedures?
For small and medium businesses (SMBs), the speed at which an invoice is settled has a big impact on the accounting sheet. Indeed, stories of smaller firms struggling to survive due to late payments are a common occurrence, with large companies often abusing the resources available to them. Only recently, outsourcing giant Capita was accused of short-changing its smaller business partners. While there does need to be a culture change amongst larger firms, a big problem is that few SMBs have an efficient and reliable invoicing process in place. As such, the need for a faster process that enables smaller businesses to have more control over their invoicing has seen the popularity of electronic invoicing (e-invoicing) increase over the past few years. With this in mind, the EU is steadily introducing new initiatives that enable businesses to take full advantage of this digital format.
In 2013, the EU passed laws giving e-invoices the same status as their paper equivalents, meaning government tax departments must now accept e-invoices as document proof for tax calculations. Indeed, its popularity in Europe continues to grow, with countries such as Italy mandating it following successful trials. Between 2009 and 2014, the use of electronic invoices increased from seven to 24 percent.
For SMBs, e-invoicing has multiple benefits. Arguably, the biggest of those is the increased efficiency of business transactions. Traditionally, invoices are sent by post, which can be hugely impractical when requiring fast payment due to the long and drawn out process. Choosing to send it physically also has the issue of manual data re-entry; an activity that is both time consuming and extremely vulnerable to human error. E-invoicing bypasses these issues completely. By sending invoices electronically, the process becomes entirely automated, digitally capturing the information before sending the document directly to the customer’s Accounts Payable (AP) through electronic document interchange (EDI).
Another benefit is increased productivity for the accounting teams. Unlike paper invoices, e-invoices can reconcile themselves automatically, which avoids the trouble of manually matching payments against invoices and prevents confusion in cases where the customer has paid a differing amount. E-invoices also show up immediately in the accounting ledgers, allowing a firm to see its current financial position, something that is invaluable around auditing time.
A further advantage is the reduction in costs. Every stage of the invoicing process incurs a fee, whether it’s specific, such as postage, or a required overhead, such as wages, every traditional invoice issued causes unnecessary expenditure. E-invoicing diminishes this total by removing the need for previously essential actions. In fact, the EU has said that it expects its e-invoicing initiative to save EU businesses €64.5 billion annually.
Whilst the changing stance on e-invoicing is increasing adoption, the uptake is not yet compulsory. This means many SMBs will continue using traditional processes. However, for those that want to take advantage of e- invoicing, there are regulations that they must meet in order for them to be accepted by government authorities.
For example, for any e-invoice to be accepted, the supplier must have consent from the customer and be able to provide proof of this at any time. In addition, in order to work at its most efficient, the electronic invoicing process requires both sides of a business transaction to have the relevant systems in place, something a lot of smaller companies won’t have. This is a common scenario, which sees smaller companies having to manage both paper and electronic invoices, depending on the recipient.
EU regulations also state that e-invoices need to be authenticated,* have a clear electronic pathway and be unaltered from its original issuing. Companies must subsequently be able to prove that they issued the document, sent it to the correct recipient and that the invoice presented is the same as the version originally sent. Two ways for a company to achieve this is through utilising advanced electronic signatures; or through Electronic Data Interchange (EDI), which automatically captures and stores the document information. This information cannot be deleted or lost as can happen when using other methods.
Another mandate is that documents are provided in a readable format. Some formats may not be legible depending on the program needed to read them. Last year, the UK Government announced that it was changing its document format to one that is open, thus removing the need for recipients to have specialist programs in place. Elsewhere however, companies must consider the format they choose to use, not only to avoid the issue of recipients being unable to read their documents, but also for compliance reasons.
The benefits of e-invoicing are undoubtable and its popularity will continue to increase. However, whilst e-invoices enable business processes to run more smoothly, companies cannot use them as an excuse for lax business controls – which is where the new EU regulations come into play. What organizations need is a centralised system in place that enables them to effectively manage multiple invoice channels, while complying with these regulations. Traditional invoicing procedures require stringent internal auditing to ensure information can be provided to the relevant bodies when requested, and procedures for e-invoices are no different. The EU’s initiative simply means that e-invoices are the equivalent of paper ones, and thus, should be treated and managed in the same way.
*based on previous regulations that may now have been altered