How does e-invoicing work?
Before jumping into the details of e-invoicing, it’s important to understand what exactly electronic invoicing is.
Electronic invoicing (or “e-invoicing”) is the electronic exchange of an invoicing document between a supplier and a buyer. When sent and received via a structured electronic format, the invoice can be automatically processed without the need for traditional paperwork.
E-invoicing is now common practice for businesses of all sizes across the globe and has steadily grown over the past 30 years. You can read more about what e-invoicing is via our blog.
While the concept is largely the same across the globe the legal requirements differ from country to country. From formats to procedures to local e-invoicing rules.
Many countries have started to determine their own format and structures in line with their tax compliance rules. Many are putting mandatory processes in place to help close their “VAT gap” and improve their overall tax compliance. Read about how tax compliance and e-invoicing relate and what is meant by the VAT gap here.
Many countries and networks have their own e-invoicing standard:
The European Commission and EU members introduced a European Standard for e-invoicing relating to B2G (Business-to-Government) and G2G (Government-to-Government) transactions. This is outlined as part of the European Directive 2014/55/EU.
The European standard is a semantic data model which lists the necessary elements that an e-invoice needs to include in order to be legally and tax compliant. This data model is technology neutral and can be employed using two XML formats – UBL and CII. Read in more detail here.
Pan-European Public Procurement Online (Peppol) is an international network that enables businesses to exchange documents and data securely with other registered users. Businesses join the Peppol network via an access point and all e-invoices are processed within the Peppol framework. Currently there are around 200 certified access point providers internationally. Learn more about Peppol via our blog post.
EDIFACT is an abbreviation for "Electronic Data Interchange for Administration, Commerce and Transport". This is a global set of rules that was designed in 1986 for the inter-company electronic data exchange between two or more business partners via EDI. But the process can be different depending on the setup between each business.
EDIFACT was defined by the United Nations (UN) and is widely used across Europe. The standard defines the type of address, format and infrastructure that is required for compliant e-invoicing to take place.
Some countries have specific standards designed for their own requirements. For example, in Italy it is FatturaPA — an XML invoicing format. Since 1st January 2019, the vast majority of business invoices must be submitted to the Italian Revenue Agency’s e-invoicing platform, Sistema di Interscambio (SdI). This helps the Italian government track e-invoices across the country.
The three parts of e-invoicing
To make e-invoicing work, three key things are needed:
1. E-invoicing addresses
Firstly, any parties involved in e-invoicing must have their own e-invoicing address. An e-invoicing address can vary depending on the country and service provider. Such as a standard email address or ID number.
E-invoicing formats are often determined by each country. A common European format is XML, adapted by each country to include country-specific information such as:
- Value Added Tax (VAT) number - a unique number which is different for each country
- Global Location Number (GLN) - a 13-digit number which is globally unique
- Data Universal Numbering System (DUNS) - a 9-digit number issued by Dun & Bradstreet
There are generally three types of infrastructure used to exchange e-invoices:
- 2-corner model - a simple, P2P (peer-to-peer) model in which supplier and buyer exchange electronic documents using EDI or XML files.
- 3-corner model - supplier and buyer use the same third-party service to exchange documents. The third-party provider might use the cloud or e-invoicing software.
- 4-corner model - both supplier and buyer use different providers to process their electronic documents. Here, the two service providers work together to complete the transfer through an international network which connects businesses and organisations.
The e-invoice journey
1. An electronic invoice is created using an ERP system, e-invoicing provider or via a manual online form. The number of invoices will determine what process a business chooses to take.
2. Information is added, generally the same information included in typical paper invoices. However, a tax authority or supplier may need additional, tailored information that complies with their rules.
3. The invoice is then converted to the format the receiver requires. Different customers and tax authorities will use different formats, therefore it is vital to choose an e-invoicing provider that converts your e-invoice into any format the recipient needs. The invoice is then distributed via the recipient’s channel of choice. Such as straight into their ERP system, via a government portal or even print and post.
Choosing the right e-invoicing software/provider
With no singular global e-invoicing format, it’s beneficial to select e-invoicing software and a provider that converts data automatically and supports all formats.
A trusted provider should connect to international networks to ensure tax compliance across many countries with different standards.
Services such as invoice templating, digital payment buttons and electronic signatures can add extra value. A provider that also has an inbound solution, such as Unifiedpost Group’s Collect, can make Accounts Payable (AP) and Accounts Receivable (AR) processes even simpler.
How our solutions can make the difference
Unifiedpost Group’s e-invoicing solutions make the process simple, no matter how big or small the customer.
Our Collect and Channel solutions are tailored for medium to large businesses that need a quick, automated solution that converts their documents and data into any format. Tax compliant in over 60 countries our solutions connect to international networks and provide numerous advantages.
For micro-small businesses, Banqup is a quick and simple solution that allows the management of invoices, billing and admin in one place.
Get in touch to find out how we could make a difference to your business.