The clearance model is gaining a stronger foothold in Europe

There are different models out there that ensure compliance in electronic invoice processes.

What is the clearance model?

There are different models out there that ensure compliance in electronic invoice processes. There is for example so called post-audit approach, in which basically trading partners need to archive invoices and they also need to be able to present them for future proof for up to 10 years after the invoice date. This model is based in the world of paper invoicing and in the countries which have basically copied the old processes to the new world.

But with new technological possibilities governments are looking at new ways to tackle the so called VAT gap. And this is where the clearance model comes in. The clearance model has its origins in countries that have, to put it mildly, a rather high VAT gap. Or in other words, in countries where a lot of money is channeled past tax authorities costing the state millions. Thinking further, it causes the state to have less money to invest into education, healthcare and the likes, further manifesting the equality gap. Does it feel like I sound too much like Marx already? Don’t worry, that’s not going to be the case. Still, I feel it’s important to highlight that the VAT gap has clear implications on the lives of people in different countries and that it’s important to look for better solutions to solve this gap.

And this is what the Continuous Transaction Control ( CTC) model is about. In countries that operate under the clearance model, the tax administration requires that invoices are approved before the supplier can send it to the buyer. There are several ways of doing this. But two most spread CTC processes are either "Real-Time reporting" or the "Clearance model". In case of Real Time reporting, the supplier sends the copy of the invoice (or most important VAT related data of that) to the government at the time when the invoice is issued and respectively the buyer reports the same information at the time of receiving the invoice. In this way the public sector can compare the invoice data and has an on-line visibility into the VAT situation of the country. In case of the clearance model the control from Tax Authority (TA) is even stricter - at the time the invoice is issued it is sent to the TA for approval and the supplier cannot deliver invoices to the buyer before the TA accepts the invoice. In some cases, such as Italy, a government channel is even used to transfer the invoice to the buyer. In short, instead of proving later that all taxes are paid, it is checked upfront and it has proved in the countries where it is already in use that VAT collection has improved remarkably effective.

The clearance model in a way is a perfect win-win situation for the government, countries and businesses alike. It pushes countries further ahead on their digitalization curve to electronic invoicing and at the same time businesses can use these technologies to make life easier because they can deal with their VAT upfront without having to store a massive paper trail with the ghosts of invoices past. And lastly of course the state (and thereby the citizens) benefit because the clearance model helps to close the VAT gap. More...