An estimated €177 billion in VAT revenues was lost due to non-compliance or non-collection in 2012, according to the latest VAT Gap study published by the Commission. This equates to 16% of total expected VAT revenue of 26 Member States1. The VAT Gap study sets out detailed data on the difference between the amount of VAT due and the amount actually collected in 26 Member States in 2012. It also includes updated figures for the period 2009-11, to reflect a refinement of the methodology used. The main trends in the VAT Gap are also presented, along with an analysis of the impact that the economic climate and policy decisions had on VAT revenues. 

Algirdas Šemeta, Commissioner for Taxation, said: "The VAT Gap is essentially a marker of how effective – or not - VAT enforcement and compliance measures are across the EU. The figures show there is a lot more work to be done. Member States cannot afford revenue losses of this scale. They must up their game and take decisive steps to recapture this public money. The Commission, for its part, remains focussed on a fundamental reform of the VAT system, to make it more robust, more effective and less prone to fraud." 

The VAT Gap is the difference between the expected VAT revenue and VAT actually collected by national authorities. While non-compliance is certainly an important contributor to this revenue shortfall, the VAT Gap is not only due to fraud. Unpaid VAT also results from bankruptcies and insolvencies, statistical errors, delayed payments and legal avoidance, amongst other things. 

In 2012, the lowest VAT Gaps were recorded in the Netherlands (5% of expected revenues), Finland (5%) and Luxembourg (6%). The largest Gaps were in Romania (44% of expected VAT revenues), Slovakia (39%) and Lithuania (36%). Eleven Member States decreased their VAT Gap between 2011 and 2012, while 15 saw theirs increase. Greece showed the greatest improvement between 2011 (€9.1 billion) and 2012 (€6.6 billion), although it is still one of the Member States with a high VAT Gap (33%).

Background

The VAT Gap study is funded by the Commission as part of its work to reform the VAT system in Europe and clamp down on tax fraud and evasion. Tackling the VAT Gap requires a multi-pronged approach.

First, a tougher stance against evasion, and stronger enforcement at national level, are essential. The VAT reform launched in December 2011 has already delivered important tools to ensure better protection against VAT fraud. For example, the Quick Reaction Mechanism, adopted in June 2013, allows Member States to react much more swiftly and effectively to sudden, large-scale cases of VAT fraud. 

Secondly, the simpler the system, the easier it is for taxpayers to comply with the rules. Therefore, the Commission has focussed intently on making the VAT system easier for businesses across Europe. For example, new measures to facilitate electronic invoicing and special provisions for small businesses came into force in 2013, and the proposed standard VAT declaration will significantly reduce the administrative burden for cross-border businesses. From 1 January 2015, a One Stop Shop will enter into force for e-services and telecoms businesses. This will promote more compliance by greatly simplifying VAT procedures for these businesses and enabling them to file a single VAT return for all their activities across the EU. 

Thirdly, Member States need to modernise their VAT administrations in order to reduce the Vat Gap. For example, potential measures to improve procedures are addressed in the report on VAT collection and control procedures across Member States, within the context of EU own resources, published in February 2014. 

Finally, Member States need to reform their national tax systems in a way that facilitates compliance, deters evasion and avoidance, and improves the efficiency of tax collection. The Commission has given clear guidance in this respect through the country specific recommendations.