In nominal terms, the VAT gap decreased by €10.5bn to €147.1bn in 2016, a drop to 12.3% of total VAT revenues compared to 13.2% the year before.

However, the Commission noted significant variation between member states. The VAT gap shrank in 22 member states with Bulgaria, Latvia, Cyprus, and the Netherlands all recording a decrease of more than five percentage points in VAT losses.

In contrast, the VAT gap increased in Romania, Finland, the UK, Ireland, Estonia, and France. Overall, the VAT gap ranged from 0.85% in Luxembourg, to 35.9% in Romania.

The Commission said variations in the VAT gap reflect the differences in member states in terms of tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration, as well as structural differences in national economies and other variables.

Its study also looked at what it called the ‘policy gap’, which is an indicator of the additional VAT revenue that a member state could theoretically collect if it applied a uniform VAT rate on all consumption of goods and services supplied for consideration.

The policy gap is broken down into the rate gap, which represents the potential revenue loss due to the existence of reduced rates, and the exemption gap which represents the potential revenue loss due to the existence of exempted supplies of goods and services.

The exemption gap is normally the larger of the two and is at 34.9% in the EU on average. Member states with the highest exemption gap are Spain (46.7%) and UK (44.7%), while the lowest values were seen in Cyprus (16.8%) and Romania (24.9%).

The rate gap, on the other hand, ranges from a low of under 1% in the case of Denmark, to a high of 27% in Cyprus. The average is just under 10%.

The Commission said the results of its study moderate views about the relative importance of reduced rates and exemptions in decreasing the potential VAT revenue, and suggest that better enforcement remains a key component of any strategy to improve the functioning of the VAT system.

Pierre Moscovici, commissioner for economic and financial affairs, taxation and customs said: ‘Member states have been improving VAT collection throughout the EU. But a loss of €150bn per year for national budgets remains unacceptable, especially when €5bn of this is lining the pockets of criminals, fraudsters and probably even terrorists.

‘A substantial improvement will only come with the adoption of the VAT reform we proposed a year ago. I urge member states to move forward on the definitive VAT system before the European Parliament elections in 2019.’

Last year the Commission proposed what it described as the biggest reform of EU VAT rules in a quarter of a century. The four ‘cornerstones’ of a new definitive single EU VAT area would involve charging VAT on cross-border trade between businesses; having a ‘one stop shop’ in the form of a single online portal for declarations and payments; a move to the principle of 'destination' whereby the final amount of VAT is always paid to the member state of the final consumer and charged at the rate of that member state; and a simplification of invoicing rules.

These proposals are still under discussion before being brought before the European Parliament.

Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report is here

Report by Pat Sweet