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Brussels warns: Mind the VAT gap

[ October 3, 2017   //   ]

‘Lost’ value added tax by EU member states is “shocking”, said the European Commission’s head of taxation and customs, Pierre Moscovici, following publication of a new report on the ‘VAT Gap’.

In the report, published on 28 September, he said that EU countries lost an estimated total of €152 billion in VAT revenues in 2015.

He said that while the collection of VAT revenues “shows some signs of improvement,” the missing amounts remain “unacceptably high”.

The report comes just ahead of proposals by the Commission to overhaul the VAT system.

The VAT Gap is the difference between expected revenue from VAT and the amount actually collected. While some of the loss is due to deliberate fraud or avoidance by traders, bankruptcies, insolvencies and errors in tax administration also play a part.

While average EU figures are improving, individual VAT collection performances vary significantly between member states. In percentage terms, the largest VAT gaps were reported in Romania (37.2%), Slovakia (29.4%) and Greece (28.3 %) and the lowest in Spain (3.5%) and Croatia (3.9 %). Sweden actually a small negative gap, but that may be due to accounting issues.

In absolute terms, the highest VAT gap, €35 billion was in Italy. The UK’s gap was €22bn, roughly on a par with the other major EU economies, Germany (€22bn) and France (€20bn).

The VAT Gap decreased in most Member States, with the strongest improvements in Malta, Romania and Spain, but there was a small increase in the UK and six other member states.

Moscovici, who is Commissioner for Economic and Financial Affairs, Taxation and Customs said: “Member States should not accept such shocking losses of VAT revenues. While the Commission is supporting efforts to improve collection throughout the EU, current VAT rules date from 1993 and are outdated. We will soon propose to revamp the rules governing VAT on cross-border sales. Our reform will help cut cross-border VAT fraud by 80% and get badly-needed money back to member state coffers.”

In a statement, the Commission said that in October it would set out proposals for the most far-reaching update to the EU’s VAT rules in 25 years to tackle fraud and make VAT collection more efficient.

Large-scale VAT fraud has also been linked with organised crime including terrorism, the Commission added. Solutions to this problem can only be found by Member States working together.

In April 2016, the Commission adopted a VAT action plan of immediate actions to tackle VAT fraud and also take the first steps towards a mooted single EU VAT area.