Member States made progress in VAT compliance in 2021, though losses remain considerable
Most EU Member States made progress in the enforcement of Value-Added Tax (VAT) compliance in 2021, according to a new report released by the European Commission today. The annual VAT Gap study, which measures the difference between theoretically expected VAT revenues and the amount actually collected, shows that Member States lost around €61 billion in VAT in 2021, compared to €99 billion in 2020.
This figure represents revenues lost mainly to VAT fraud, evasion and avoidance, non-fraudulent bankruptcies, miscalculations and financial insolvencies, among other drivers.
This progress in enforcing VAT compliance is welcome since lost VAT revenues can have an extremely negative impact on governments’ capacity to fund the public goods and services upon which we all depend, such as schools, hospitals and transport.
The latest report shows that targeted policy responses made a difference, particularly those related to digitalisation of tax systems, real-time reporting of transactions and e-invoicing. At the same time, temporary factors such as government support measures implemented during the COVID-19 pandemic, which were often contingent on paying taxes, may also have played a role in driving this positive change.
Main results in 2021
In nominal terms, the overall EU VAT Gap decreased by around €38 billion, from €99 billion in 2020 to €61 billion in 2021, an unprecedented improvement on previous years. A number of Member States such as Italy (-10.7 percentage points) and Poland (-7.8 percentage points) recorded particularly notable reductions in their national VAT Gap figures.
| Member State | VAT Gap % | VAT Gap (in €mn) | Member State | VAT Gap % | VAT Gap (in €mn) |
| Belgium | 6.9% | 2 530 | Lithuania | 14.5% | 795 |
| Bulgaria | 4.9% | 347 | Luxembourg | 1.6% | 70 |
| Czechia | 7% | 1 362 | Hungary | 4.4% | 709 |
| Denmark | 5% | 1780 | Malta | 25.7% | 345 |
| Germany | 2.8% | 7 460 | The Netherlands | -0.2% | -146 |
| Estonia | 1.4% | 40 | Austria | 2.8% | 883 |
| Ireland | 6.7% | 1 116 | Poland | 3.3% | 1 694 |
| Greece | 17.8% | 3 231 | Portugal | 3.6% | 713 |
| Spain | 0.8% | 662 | Romania | 36.7% | 8 996 |
| France | 4.9% | 9 552 | Slovenia | 2% | 87 |
| Croatia | 5.7% | 461 | Slovakia | 10.6% | 871 |
| Italy | 10.8% | 14 600 | Finland | 0.4% | 90 |
| Cyprus | 8.3% | 197 | Sweden | 3.8% | 1 935 |
| Latvia | 7.3% | 225 | EU | 5.3% | 60 603 |
Aside from some specific effects caused by the COVID-19 pandemic, the unprecedented uptick in VAT collection and decrease in the overall VAT Gap in most Member States could be explained by a variety of factors. First, electronic payments and online shopping, where the rate of VAT compliance is generally much higher, have grown in popularity since the COVID-19 pandemic. Second, Member States are reaping the benefits of targeted measures put in place in their domestic tax systems such as new digital reporting tools, the real-time tracking of transactions, and e-invoicing regimes which are particularly effective against criminal VAT fraud.
As part of the 2022 VAT in the Digital Age proposals, currently under discussion between Member States in the Council, the Commission has notably put forward plans for a move to a cross-border digital reporting system based on e-invoicing for business-to-business transactions. The new system would make sure that Member States’ authorities are fully informed of transactions in almost real time, allowing them to immediately address instances of VAT fraud, especially missing trader or carousel fraud.
Background
The VAT Gap is relevant for both the EU and Member States since VAT makes an important contribution to both the EU and national budgets. The study applies a “top-down consumption-side” methodology using national accounts data to produce estimations of the so-called VAT Total Tax Liability (VTTL), which captures the tax revenue that would have been collected if all taxpayers fully complied with their VAT obligations. The VAT Gap is calculated as the difference between the VTTL and actual VAT revenues and as such represents VAT revenues lost compared to the VTTL.
For more information, see our factsheet.
The full report with detailed information per Member State is available here.
Quote(s)
The marked improvements in the latest VAT Gap figures are good news for public finances in Europe. They can be attributed mostly to well-targeted national measures that have been consistently implemented. Now we need to deliver a strong push at EU level too, which means enacting our ‘VAT in the Digital Age’ proposals, which represent a real game-changer in terms of speeding up and facilitating tax authorities’ access to information on business-to-business transactions. I call on Member States to come to a swift agreement on the new measures so we can further reduce VAT losses – especially those caused by cross-border criminal fraud.
