The economy can be categorised in many ways, including (i) the tax-compliant economy, (ii) the tax quasi-compliant economy and (iii) the tax non-compliant (or ‘black market’) economy. Value-added-technology(VAT) shortfalls occur in all three for a variety of reasons that may include business insolvency; creative use of international laws to structure companies in such a way as to circumvent tax liability; or the more straightforward ‘no paperwork, cash only’ scenarios. The annual shortfall in the EU’s VATrevenue is estimated to be between €151 billion and €193 billion10. Distributed Ledger Technology(DLT) has both the exponential growth characteristics and the potential to make transactions significantly more transparent. The UK could play a pivotal role in supporting the development of technology, process protocol and implementation solutions for DLT in order to reduce the EU’s VAT shortfall.
Moore’s Law correctly forecasted the exponential growth in digital computational processing density several decades ago. In fact, information technology has been growing exponentially since the late 1800s, with current predictions indicating this should continue throughout the 21st century. Information technologies are self-generating because they help to navigate the unknowns of nature through scientific discovery. This in turn enables us to develop faster and more cost-effective technologies, thus uncovering more of nature’s secrets, which ultimately leads to a compounding of technological capacity.
There are numerous information technologies available to help significantly reduce VAT shortfalls, including machine learning, super digital computers, quantum analogue computing, and distributed ledger technology. The key challenge is for governments to implement and leverage these technologies faster than organised crime groups can deploy them.
The development of an EU-wide series of VAT standards and protocols would enable DLT to be deployed across Europe, with unilateral alignment of all VAT accounting transactions, from invoices to bank receipts. The system could include smart contracts designed to outsmart the tax quasi-compliant economy, which would also help to address the various threshold differences in VAT applicability across EU member states. With machine-learning devices reading the EU’s VAT transactions in real time, erroneous transactions (including so-called carousel fraud) are far more likely to be spotted than by the current methods of auditing. Increasing traceability and transparency — including payment providers, banks and other financial institutions — would make the black-market economy more difficult to conceal.
• Reduce the administrative burden imposed on companies and other organisations to collect and pay VAT
• Increase transparency of real-time transactions throughout the economy
• Create opportunities to assess credit risk more accurately, reducing losses caused by insolvency
• Provide data to lenders that offer finance to SMEs, including credit factoring
• Enable smart contracts between treasuries and commerce Maturity level
• Technologically ready
• Important to bring payment organisations into the conversation early on, as their data inputs are also required to ensure visibility over payment settlements
• Government agencies need to be able to handle DLT for tax
• End-users and small business owners need to understand how to use DLT for effective tax management