European Commission research has found that around €193bn (£162bn) in VAT revenues was not collected in the 26 member states in 2011, due to non-compliance or non-collection, and says this is equivalent to 1.5% of the total GDP of those countries.
The Commission says losses amount to 18% of the expected revenue from VAT and are not just down to fraud. It says that unpaid VAT also results from bankruptcies and insolvencies, statistical errors, delayed payments and legal avoidance, as well as ineffective tax administration. The report states that 'for example, in the UK, one third of the VAT gap in 2009-10 was due to legal tax avoidance'.
According to the Commission's analysis Italy (€36bn/£30bn), France (€32bn/£26bn), Germany (€26.9bn/£22.6bn) and the UK (€19bn/£16bn) contributed over half of the total VAT Gap in quantitative terms, mainly because these are the largest EU economies.
In terms of ratio to their own GDP, Romania (€10bn), Greece (€9.7 bn), Lithuania (€4.4bn) and Latvia (€0.9bn) were the countries with the largest VAT gap in 2011.
The study shows a marked upward trend in the VAT gap since 2008, as a result of the economic crisis, especially in Spain, Greece, Latvia, Ireland, Portugal and Slovakia. On average across the EU, the VAT gap increased by 5 percentage points once the economic crisis hit.
Algirdas Aemeta, commissioner for taxation, said: 'The amount of VAT that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances. We know the problem; we have identified solutions to it, and now it's time for Member States to act. Today's figures will serve as a baseline to assess their progress in improving VAT compliance in the years ahead.'
The report also looks at the 'policy gap', the difference between the yields member states could achieve if they applied uniform taxation to all consumption, compared with the revenues actually received due to the various tax expenditures in their systems. This varies considerably, from a low of 14% in Romania to a high of 48% in Spain and Poland.
The average policy gap (36%) is approximately twice as large as the average VAT gap (17%) across the EU, which the Commission says shows that the most important loss of VAT revenue is not due to non-compliance (VAT gap) but down to policy choices which have resulted in multiple rates and exemptions in national tax systems.
'This confirms the Commission's consistent position that member states should broaden their tax bases and minimise exemptions and reductions in order to improve the efficiency of their tax systems. This would not only result in substantial new revenue, but it would also create simpler tax systems for businesses to work within, thereby facilitating greater compliance,' the report states.
