Can E-invoicing help small business David’s in their ongoing battle against industrial Goliaths?

The UK’s “David”s (representing our SMEs) fight a constant and punishing battle against the big-business Goliaths, who seemingly make up their own rules when it comes to payment terms and settling trading debts. This puts huge pressure on cash flow and the general working capital requirements of these SME businesses, who typically suffer higher borrowing costs to cover the funding gap, when compared to those big businesses, who cause these problems.

One way to even the playing field is through the implementation of e-invoicing, including legislation that ensures businesses honour the terms and conditions – including payment terms – of ALL suppliers, however big or small, which would hugely benefit the SME landscape.

State of play

Currently e-invoicing is mandated, to some extent, in around 20 countries (e.g., Albania, Australia, Belgium, Greece, France, Hungary, Kenya, Poland, Saudi Arabia, Serbia, Spain, Tunisia, Turkey) with about half that number again bringing in rules by the end of 2026 (e.g., Bahrain, Bulgaria, Germany, Latvia) and the rules impact any company trading B2B in these jurisdictions.

Looking specifically at our neighbours, France, e-invoicing is mandatory when billing public bodies, and all businesses have an obligation to accept electronic invoices from 2023 onwards. It will then become mandatory for large and small businesses to send e-invoices by early 2024.This gives us a feel as to how the legislation has been rolled out in similar economic regions.

In the UK, e-invoicing is still very new. It is currently mandatory for any suppliers to the NHS and encouraged for any other B2G invoicing. This needs to be ramped up and extended quickly, to allow SMEs and UK government to reap the benefits sooner rather than later.

From their position as a SME focussed software provider and advocate for SMEs across the world, it has been good to see Xero do great work in raising the awareness of the impact of late payments on SMEs. This includes a campaign to have such debt rebranded as ‘unapproved’ so it highlights the true nature of these breaches of the suppliers’ payment terms:

What e-invoicing brings

E-invoicing can significantly improve late payment times for small businesses. Research commissioned by Deloitte Access Economics found that every time an electronic invoice replaces a paper invoice, it can deliver up to $20 (AU) in cost savings, generating significant savings over time. It eliminates manual processes in issuing, reviewing, approving, and paying bills – automating the exchange of digital information between a seller and the buyer – and populating the accounting software of both parties with a government approved invoice.

This then generates further benefits, including:

  • Being able to monitor liabilities in near real time, with greater visibility improving cash flow management
  • Knowing your invoices are pre-approved by tax authorities prior to issue to the customer – so no invoices include numerical errors or have the incorrect vat rate applied
  • Consistent, specific formats for issuing and receiving electronic invoices via tax authority portals simplify the import of accounts payable data into accounting software, eliminating the risk of lost or delayed invoices or keying errors – this in turn helps prompt payment by reducing inquiries and disputes
  • More efficient Accounts Payable processing and bookkeeping – fast, secure, and simple

Publicly available data from shows that HMRC have done well to reduce the UK VAT Gap (the difference between what is owed and what is collected) from c14% in the 2005/06 tax year down to c5.4% for 2021/22. However, this still represents £7.6 billion in lost tax revenue a year, so there is further work to do. E-invoicing can be a big step in addressing this shortfall and is something that HMRC needs to embrace and utilise to change behaviours and payment patterns.

So, what next?

Over time, market pressure will encourage mandating of e-invoicing by the UK government, or at the very least ensure it becomes recommended ‘best practice’ for large businesses.

In addition, a greater focus by consumers on the ESG (Environmental, Social, Governance) footprint of a business means that there is increasing pressure to treat your supply chain respectfully.

From a UK governmental perspective, electronic invoicing is a natural next step on from the MTD for VAT rules and the incoming MTD ITSA legislation. E-invoicing should be seen as a huge benefit for the UK government, and if driven by government legislation and mandates, will improve HMRC’s VAT information, reducing the risk and opportunity of fraud, and closing the VAT gap.

When legislating for and rolling out e-invoicing, the government should access the well-established global software providers already offering integrated electronic invoicing solutions – partnerships with these organisations can streamline and accelerate any UK rollout as they have experience and learnings from other implementations in other tax jurisdictions.

A key to successful adoption of e-invoicing will be gaining volume of enrolled businesses and meeting critical mass. The Singapore government offered financial incentives (grants) to cover the cost of joining their e-invoicing system, and this is believed to have been successful – so worth consideration by HMRC.

It is all too easy to sit and criticise HMRC (with ongoing issues with funding and resources, appalling response times, etc) but a project like the implementation of e-invoicing would be similar in size, scale, breadth, and impact to the GDPR rules. This will make MTD for VAT feel small and straight forward in comparison! So, this project needs to be given due consideration, with sensible timeframes mapped out and have all stakeholders (HMRC, SMEs, large businesses, software providers and professional advisors) all on the same page from the outset.

Most importantly, any new legislation must include a commitment to pay electronic invoices within the agreed (contractual) payment terms. Without this, larger businesses will continue to abuse terms and put further pressure on hard-working SMEs.

For more information, please do get in touch with us via the contact form below:

    Posted in Blog