The Hungarian tax authority was one of the first in the world to offer draft VAT returns, among other things, with the aim of supporting and facilitating taxpayers in fulfilling their obligations. The project went live on 1 January 2024. From that date, the Hungarian Tax Authority prepares draft VAT returns, which can be adjusted and submitted by the taxpayers. In this article, we present the relevant legal background and the new VAT system. We map the benefits and opportunities of using the new system for taxpayers, and we also discuss the inevitable tasks of taxpayers.
1. Introduction
Similarly to the digital registration systems of some South American countries and Greece's myDATA system, the Hungarian tax authority now has a record of the live and nearly complete VAT transaction data of companies from the online cash register and online invoicing system introduced from July 2018. As another milestone in the unstoppable digitalization of tax administration, the Hungarian Tax Authority is building its new tax return system, eVAT, on this transaction data set. This new tax platform will be available to resident and non-resident enterprises with a Hungarian tax number if they carry out taxable activities in Hungary. The system is based on the OECD SAF-T standard, which describes the XML data reporting developed for the transfer of digitised tax-related accounting data, but also goes beyond it. It also includes a check-analysis toolkit for taxpayers that can help taxpayers identify trends and errors for further analysis and correction.
2. New VAT declaration methods
In the system of value added tax, tax is assessed, declared and paid according to the principle of self-taxation, i.e. it must be carried out by the taxpayer himself. With the introduction of the eVAT system, this principle continues to apply and its rules fit into it. What is changing, however, is the possible way in which the return is made. From now on taxpayers may fulfil his tax return obligation towards the tax authority in three ways instead of one. Although these methods lead to the same result in terms of the fulfilment of the return, they are completely different from each other in terms of the underlying tax administration processes:
- Submission of VAT Return Form
- Utilizing the eVAT web interface to review and approve a draft return generated by the system
- Employing the eVAT machine-to-machine (M2M) connection to transfer data and approve the compiled draft return
It should be emphasized that the choice of the method of filing the tax return is the taxpayer's discretion, i.e. the use of the eVAT system is not mandatory.
According to the law, the approval of the draft return in the eVAT system qualifies as submission of the return. If the taxpayer fulfils its return obligation in more than one of the above ways, the first return submitted shall be considered as the taxpayer's return.
On the web interface, the eVAT return can be generated from a draft eVAT return prepared from the source data available to the tax office, after optional modifications.
In the case of an M2M system the taxpayer's own accounting program is connected to the tax office system, and the taxpayer uploads the data serving as the basis for the draft return. The taxpayer's data transmitted to the eVAT system in the desired data structure qualify as tax records. The data sent in this way are used to compile a draft return that the taxpayer can then approve.
In case of approval of the return, but only then, the taxpayer can download the tax analytics on the electronic interface, and this eVAT analytics is stored in the tax authority's system, meaning that the tax authority can use it for risk analysis and tax audit.
3. The eVAT interface and system
3.1 Data sources:
In the eVAT system, taxpayers have access to the data that are included in the tax authority's register and that are available to the tax authority on the basis of various mandatory data reports: online invoices accepted and issued and online cash register data reported, as well as data of customs procedures.
This scope can be completed with manually entered documents through the web interface.
3.2 Tax codes, VAT analysis and draft tax returns
The essential elements of the system are the tax codes and the VAT analytics forming the basis of the return.
The currently slightly more than 200 tax codes control the entry of the items of each document into the appropriate line of the VAT return. They can be edited and modified, favourite tax codes can be set. Tax codes will be updated annually.
On the eVAT web interface, the items of documents are automatically assigned a tax code as a result of the machine processing of the source data. This needs to be modified, for example, in the case of deciding on the right of deduction (by default, the tax code is set to the tax code adhering to the full right of deduction), but also in the case of items subject to reverse charge, if the taxpayer wishes to exercise the right of deduction (as normally only the tax payable is set).
In the M2M system, the standard tax code catalogue can be downloaded, so the company has the opportunity to map its own tax codes to the standards.
The standardized VAT analytics and the draft tax return are compiled within the eVAT system and are performed by software.
It can be seen that the basis for fulfilling the return obligation is therefore no longer a form. The declaration process is transaction-based, focusing on more efficient data processing, error checking and risk analysis built into the process.
3.3 How eVAT works on the web interface
The web interface can be used by those who manage less than 100k invoices in a given reporting period. The return can be prepared on the basis of taxpayer decision-making ensured by editing, adjusting and modifying the displayed source data. During manual editing, it is also possible to enter data not available at the tax authority, also taking this information into account when preparing the draft return.
The option to edit documents also covers tax codes, deviations from data reporting, the management of cash flow items and the deferral of tax deduction rights. We can talk about a deviation from data reporting when, for example, the taxpayer has the original invoice issued to him, on the basis of which he wishes to exercise the right of deduction, but the data provision of his business partner issuing the invoice is incorrect for some reason, and this is reflected in the source data displayed by the tax authority. Or, when the correct invoice is available, but according to the source data there is no data provision for this invoice. In such a case, based on the correct and available invoice, it is possible to edit the source data in order to exercise the right of deduction. However, in such a case it is worth contacting the business partner as well, as an error or omission in the provision of data will raise questions from the side of the tax authority.
The taxpayer's decision on the exercise of the right of deduction is ensured by an operation at item level. This is where the taxpayer can decide on the proportion, the full or partial deduction of the given invoice item, or if they do not wish to deduct the VAT content of the invoice in the return. It should be emphasized that behind a quick push of a button there must always be careful taxpayer decision regarding the right to deduct. In such cases, the change of a given tax code is also the taxpayer's liability. The possibility of fixing the decision in the system does not mean that it is automatically accepted by the tax authority. The principles of self-taxation remain, and the tax authority can check the compliance of the taxpayer's decisions with the law in the framework of a tax audit. Items affected by the deferred right of deduction are placed in the system with a status awaiting decision, from where they can be handled further.
Documents for the declaration period are marked with the labels of pending review, awaiting review, or revised. The status pending review means that the tax authority found the document alright, but the taxpayer must deal with it. The pending review mark means that the document has at least one item to which the tax authority could not assign a tax code and expects taxpayer interaction.
It is possible to follow the processes in the system. The draft return can be downloaded from the system and also submitted here, after validation. Any errors are reported back to the taxpayer by the interface.
3.4 The process of VAT with machine-to-machine connection
If the number of managed invoices is more than 100k, the eVAT system can be used through a machine-to-machine connection. According to the communication of the tax authority, the M2M system can be chosen even if the number of managed invoices does not reach 100k, but this form is preferable for the given enterprise.
In this process, the taxpayer's own VAT analytics can be uploaded to the tax authority's server, on which – similarly to the web interface – automated checks are then run. The system returns the result of the validation to the taxpayer. The VAT declaration is made through the approval of the XML file prepared based on the uploaded VAT analytics. The process can also take place in full machine communication.
The machine interface has also optional functions related to uploading analytics. These options include the opportunity to download the tax code catalog, list and download returns, list uploaded and submitted attachments, download relevant warning messages and VAT analytics underlying the submitted return in addition to downloading customs data.
3.5 Validation
A valuable element of the eVAT system is validation, during which the tax authority practically reveals a small part of its risk analysis activity to taxpayers. The structured audit process based on tax authority data is much broader than what the program so far applied offers.
The purpose of the tax authority with validation is to reduce errors of the VAT returns and to draw the taxpayer's attention to correlations that result in risky discrepancies: for example, placing an invoice in multiple deductions or if the return does not contain an invoice that is subject to tax payable. With its help, possible software errors, data entry errors and erroneous tax practices on the part of the taxpayer can also be detected and corrected.
3.6 After the Declaration
The approved and submitted returns may be subject to tax audits in accordance with the usual and general tax administration system, with legislation introducing a short 15-day audit moratorium period for returns submitted in the M2M system.
It cannot be emphasized enough that in the case of a submitted return, it is important to download the underlying VAT analytics in time (within 90 days at the latest), as it is available for this limited time only, but the taxpayer is obliged to keep it and it can be a significant and useful document for a subsequent tax audit. The option to download the VAT return, on the other hand, is, of course, the same as the limitation period.
4. Benefits of using eVAT
We have already pointed out that the use of the new system is only an option and not mandatory, at least for the time being. However, the tax authority has drawn attention to the fact that it offers many advantages over the traditional form-based declaration method.
On the one hand, data about your activities can be viewed on the web interface, while data available to the tax authority can also be downloaded in the M2M system. So, it is also possible and worthwhile to simply use these data as your own control, for example, by performing software cross-checks, before filing the return. Thus, the process of filing a return carrying a large number of items can be significantly accelerated and risk-free, even in the familiarization phase, if we do not ultimately use the eVAT system for filing the return, but only use it for queries and downloading data. This is not excluded by law, and is physically permitted by separate processes of the system.
Therefore, the advantage of the M2M system is that by downloading the source data, we can check our VAT analytics both from the point of view of completeness and reliability.
Another argument in favour of its using is that the uploaded data set contains basic accounting data at item level, then in case of filing the return, the VAT analytics in the system will already be available to the tax authority during a possible tax audit, and it will not be necessary to make it available to it, which can save time and resources for the taxpayer.
It should also be emphasized that because of validation, the warning and error messages sent by the system will definitely draw attention to any discrepancy, anomaly or error that the tax authority will also see, analyse and address. The final stage of this errors can be a tax audit. Therefore, it is worth getting to know these feedbacks, dealing with them, analysing them, and then incorporating them into the process of preparing and correcting the return as soon as possible. This obviously increases efficiency, but it also has a preventive role. The tax authority has repeatedly emphasized among the taxpayer benefits that the use of the system has a good chance of avoiding tax authority consultations and compliance investigations initiated within the framework of desk audits due to technical errors.
On the taxpayer side, it is a great advantage that VAT can be tracked in real time and continuously. With further thinking and matching tools and software solutions, taxpayers can save additional valuable time, but in many cases, they can also be free from unpleasant questions and consequences. Sometimes an error is repeated in sequence, generating a large number of errors in sequences. In such cases mass errors can be corrected with a small investment, while they can significantly increase compliance.
The use of machine-machine connection was also encouraged by the fact that reliable taxpayers using the M2M system are not entitled to be inspected by the tax authority for 15 days after submitting the return. Taxpayers fulfilling their obligation through a machine-to-machine connection are also exempt from the late payment interest if they submit self-revisions to the tax authority within 15 days of filing the return.
Finally, it can be considered a clear advantage that taxpayers fulfilling their obligation using the eVAT system, i.e. both using the web interface and those connected via M2M, are exempt from the data reporting obligation imposed on them as invoice recipients, namely M-sheet data reporting.
5. Taxpayer options and tasks
The services and benefits available to tax authorities through the eVAT system offer taxpayers clear value. However, this is not a solution in all respects, and its extent may differ depending on the size and activity of the given enterprise, its current processes, and also its capabilities. For those with smaller and less complex transactions, it can obviously bring meaningful help. While the M2M system offers opportunities for the biggest taxpayers and multinational enterprises.
However, use of the eVAT system requires thorough preliminary preparation on the part of taxpayers. In summary, this preparation requires a combination of IT and tax professional knowledge and should include the ability to communicate with the tax authority, process downloadable data, evaluate feedback and correct its processes.
Since the M2M connection requires taxpayers' administrative system to be able to handle the specifics of the system, the tax authority published the developer documentation on GitHub, where you will also find the standard tax codes and the XSD scheme.
In addition to creating the machine interface, creating the XML for VAT analytics on which the declaration is based, it is necessary to download the aforementioned tax code catalogue and to map corporate tax codes according to the standard. This is a critical point in preparation, as incorrect tax codes will lead to an immediate error in the return.
It is also definitely worth reviewing the data content of your own ERP system. For example, but not limited to, partner master data and data reporting processes. It is strongly worth considering cleaning up errors in our data file, for example, in the online invoice data. By doing so, taxpayers can speed up the tax return process and avoid the attention of the tax authority, still in cases when they finally decide not to use the eVAT system for some reason.
Finally, we need to be ready to interpret and handle the warning and error messages reported by the tax authority as quickly and efficiently as possible, not only at software level, but also in our internal processes (with those responsible, deadlines). In some cases, we may need to be able to separate, interpret and handle a very large batch of error messages, for which it is worth looking for an automated support solution.
6. Conclusion
In summary, it is definitely worth getting acquainted with the system and shaping and developing our own processes in such a way that we can put the advantages offered by the new solution at our service for an ever more complete and reassuring tax compliance.
Furthermore, it cannot be ignored that although the regulation is still dispositive, i.e. it provides taxpayers with a choice, due to the ever more complete and widespread digitalization of tax administration processes, there is reason to imagine a not-so-distant future in which the fulfilment of returns in the VAT system will no longer be an option, but a taxpayer's obligation. Furthermore, the scheme could be extended to other types of taxes, such as corporate tax. And such a change is always easier and more successful to implement into internal processes already in an informed way, with a confident knowledge of all information and circumstances.
Finally, we should also emphasize that the above system is very similar to the eVAT system, which partners of Horizon Solutions made under the Taxnology brand several years ago and which was presented in a Finovate conference in 2019 in London (https://finovate.com/category/taxnology/). The Taxnology system was also presented to the Hungarian tax authority and finally received the judgement that it is able to prepare the VAT returns according to the rules. Thus, Horizon Solutions, with its expertise in tax technology, stands ready to support businesses in navigating and leveraging the benefits of the new eVAT system and can offer clear value through several tax technology solutions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
