EU VAT Gap increased in 2022

 Posted by: Christina Cawley

  19 December 2024

On 18 December, 2024, the European Commission issued a report outlining its findings on the VAT compliance Gap in the European Union. The VAT gap represents the difference between the VAT revenue expected and the amount actually collected. It is often used as an indicator of the efficiency and effectiveness of VAT enforcement and compliance in EU Member States.

The report highlights that the VAT compliance gap in 2022 amounted to EUR 89 billion which was an increase to the amount reported in 2021.  Compared to 2021, the gap went up by EUR 13.3 billion or 0.4%. However, it should be noted that in 2020 and 2021, COVID 19 resulted in less robust data due to the complexities caused by deferred tax payments, revisions in national accounts and lower quality of national statistics owing to the turbulent conditions in these years. Thus, the report also took into account comparisons over a 5 year period from the years 2019 - 2022 as this was seen to be more informative.

Overall, the increase in 2022 is viewed as a stabilisation following a sharp decline of nearly €50 billion between the years 2019 and 2021.  Over the five year period, the gap has shown a clear downward trend, decreasing by approximately €30 billion from 2018 to 2022. Credit is given to several reforms in relation to the long-term reduction in the VAT compliance gap such as;

  • Introduction of electronic declarations, real-time reporting requirements and compulsory e-invoicing
  • Use of online cash registers;
  • Streamlining tax administration systems; and
  • Increasing adoption of digital payments, which enhance traceability.

A significant addition in this year’s report is the focus on the actionable VAT policy gap, which identifies the portion of VAT revenue lost due to reduced rates and exemptions that Member States could potentially revise. For 2022, the actionable VAT policy gap accounted for around 20% of the theoretical VAT revenue. The report also presented a hypothetical scenario whereby if all actionable exemptions and reduced rates were repealed, the EU's average VAT rate could be lowered by almost 5% resulting in an average VAT rate of 16.6% across the EU while maintaining revenue neutrality.

The European Commission’s findings emphasise the progress made in narrowing the VAT compliance gap over the years, despite recent fluctuations. With ongoing reforms and policy adjustments, particularly with the introduction of VIDA, the EU commission hope this will further enhance VAT collection efficiency and streamline tax systems across the EU to reduce revenue losses.

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