What is the VAT gap?
The VAT gap is the difference between the VAT submitted and the VAT collected. The difference is caused by a number of factors - the main one being tax fraud¹. Fraudulent invoices are submitted to the tax authority, in order to claim VAT that does not exist.
VAT gap estimates are crucial for revealing the extent and nature of lost VAT revenue due to non-compliance and rule design. They offer valuable insights for informed policy decisions and improvements to tax administration, shedding light on strategies to enhance VAT collection efficiency.
The VAT gap exists all over the globe, and is currently an issue for many European Member States who have VAT gaps into the millions, and in some cases billions, of Euros.
Any loss in VAT causes a big impact on national budgets. In 2021, the contribution of VAT accounted for approximately 27% of the total yearly tax receipts for the general government in the EU². Countries and their tax authorities cannot plan their spend on public services if the VAT they are expecting does not equate to the VAT they receive.
This is why many countries are putting in a lot of time and effort to ensure they close their VAT gap.
History of the EU VAT Gap report
Each report analyses the VAT gap using data from two years before its publication, as the necessary data for a comprehensive report on the previous year is not available when the report is released.
Therefore, the first report, published in 2009, examined the VAT gap in 25 EU Member States for the year 2007. The next report was in 2014, and thus every year since.
The report provides a breakdown of each Member State's VAT gap in both monetary terms and as a percentage of lost VAT revenue relative to the total VAT claimed by the Member State. These two sets of figures are crucial; the monetary value reveals the actual amount of VAT lost, which is crucial to overall EU figures. While the percentage illustrates each country's proportionate representation of how much VAT they expect to receive.
2023’s EU VAT GAP report
2023’s report analyses the VAT gaps from 27 EU Member States, from the year 2021.
Overall, the 27 Member States lost around €61 billion in missing VAT, a notable decrease from the 2020 figure of €99 billion. The report shows positive findings with a significant reduction each year:
- 2017: €146 billion for 28 Member States (11.9%)
- 2018: €143 billion for 28 Member States (11.2%)
- 2019: €140 billion for 28 Member States (10.7%)
- 2020: €99 billion for 27 Member States (9.6%)
- 2021: €61 billion for 27 Member States (5.3%)
Which countries have made notable changes?
Despite Italy having the highest VAT gap in terms of actual Euros, it has made the biggest percentage decrease since 2020 (10.7%). Poland followed closely with a 7.8% decrease.
The smallest gaps were the Netherlands (0.2%), Finland (0.4%), Spain (0.8%) and Estonia (1.4%). Interestingly, the Netherlands has a negative value, as according to the European Commission, “Negative values can occur in Member States where non-compliance is already very low due to statistical and measurement inconsistencies.”
While Italy and Poland have made substantial progress since the 2020 report, it’s crucial for these countries to make the right changes, as their influence on the overall EU VAT gap is paramount.
From 2019 to 2021, France, Germany, Italy, the Netherlands, Poland and Spain collectively accounted for over 80% of the decline of the EU’s overall VAT gap. Germany and Italy alone made up over 50% of this total.
What are Member States doing to decrease their VAT Gap?
Together with different tax incentives (i.e. reduced tax rates), many countries have either initiated, or are initiating, mandatory electronic invoicing or electronic reporting. Mandatory e-invoicing or e-reporting can help close the VAT gap when guided by the right procedures.
Firstly, an electronic invoice (e-invoice) created in a structured electronic format reduces errors and inconsistencies that paper invoices may possess.
Accurate invoicing is pivotal in ensuring precise VAT calculations. The implementation of e-reporting empowers tax authorities to more accurately assess VAT information, monitor economic performance and trends, and identify discrepancies, errors, and fraud at an early stage. While an e-reporting requirement is often associated with an e-invoicing mandate, it can also function independently.
Romania, despite sharing similarities with other Member States in the macroeconomics situation and other fiscal measures, did not have a noticeable impact on the development of the VAT compliance gap. Until 2022, Romanian VAT payers were not obligated to report transactional data, a contrast to Latvia, Hungary, Poland and Slovakia. This absence likely impacted tax enforcement effectiveness adversely. In addition the country is rolling out a large-scale e-reporting and e-invoicing mandate commencing on the 1st of January 2024.
Secondly, many tax authorities have introduced a government platform within their e-invoicing regulations. Each country’s platform and regulation model performs differently, but essentially their core objective remains the same - preventing the circulation of fake, or fraudulent, invoices.
Some countries, such as Turkey and Italy, require the invoice to be cleared by the government platform before reaching the recipient. Whereas some countries, like France in the near future, require the e-invoice service provider to “feed” the invoice information directly to the tax authority’s platform on behalf of the customer.
Whichever model adopted by a country, all models work toward the common goal of mitigating VAT fraud and illegitimate VAT claims - thus helping to close the VAT gap.
Which countries have already introduced mandatory electronic invoicing?
More and more European countries are announcing their e-invoicing intentions - B2G e-invoicing is becoming the norm and B2B e-invoicing is on the horizon.
Italy and Serbia already have B2B regulations in place. In 2024, Romania and Poland will begin their B2B mandates. The trend will continue into Latvia, Germany, France, Spain and Belgium, all of whom have already announced similar intentions.
Staying up to date
Keeping up to date with the VAT gap is one challenge, but staying up to date with the mandatory regulations can be more difficult.
With Unifiedpost Group, you can rest easy knowing our team of e-invoicing and e-reporting experts are doing the work for you. We update our tax compliance and e-invoicing guide on a regular basis, and ensure our customers have the most up to date compliance information and processes they need.
To learn even more about the VAT Report Gap 2023, take a look at the European Commission’s website where you will find the full report, an executive summary and also a factsheet.
Details correct as of the publishing date. For the most up to date regulations, view each country's regulations information.