The VAT Gap: Questions and Answers - Hoofdinhoud

See also press release here.

What is VAT?

VAT is a consumption tax, charged on most goods and services traded for use or consumption in the EU. It is levied on the "value added" to the product at each stage of production and distribution. The "value added" means the difference between the cost of inputs into the product / service and the price at which it is sold to the consumer. VAT is charged when VAT-registered (taxable) businesses sell to other businesses (B-2-B) or to the final consumer (B-2-C). VAT is intended to be "neutral" in that businesses are able to reclaim any VAT that they pay on goods or services. Ultimately, the final consumer should be the only one who is actually taxed. Businesses are given a VAT identification number and have to show the VAT charged to customers on the invoices.

The VAT system in the EU is governed by a common legal framework - the VAT Directive. In the EU, there is a minimum standard VAT rate of 15%, above which Member States are free to set their own national VAT rates. VAT is one of the main sources of government revenue for all Member States and one of the three "own resources" of the EU.

What is the VAT Gap?

The VAT Gap is defined as the difference between the amount of VAT actually collected and the VAT Total Tax Liability (VTTL), in absolute or percentage terms. The VTTL is an estimated amount of VAT that is theoretically collectable based on the VAT legislation and ancillary regulations. The study calculates the VTTL for each country on the basis of national accounts by mapping information on standard, reduced rates and exemptions onto data available on final and intermediate consumption, along with other information provided by Member States. This means that the quality of the VAT Gap estimates depends on the accuracy and completeness of national accounts data.

The VAT Gap is an indicator of the effectiveness of VAT enforcement and compliance measures, as it provides an estimate of revenue loss due to fraud and evasion, tax avoidance, bankruptcies, financial insolvencies as well as miscalculations. As the VAT Gap in the study is based on a top-down approach, it does not readily lend itself to being deconstructed according to industrial sectors or other criteria (territorial, professional), and can be best used as a diagnostic tool in the context of its evolution over time.

Why did the Commission sponsor this study?

The study to quantify and analyse the VAT Gap in the EU Member States (hereafter: the 2015 Report) provides estimates for the VAT Gap for 26 EU Member States for 2013 as well as revised estimates for the period 2009-20012. It is a follow-up to the report “Study to quantify and analyse the VAT Gap in the EU-27 Member States”[1], published in September 2013 (hereafter: 2013 Report), and to the report “2012 Update Report to the Study to Quantify and Analyse the VAT Gap in the EU-27 Member States” [2], published in October 2014 (hereafter: 2014 Report). The aim of the study and the reports is to quantify the VAT Gap and to better understand the trends in the EU in the field of VAT collection. This can then help to address (policy) measures to improve VAT compliance and enforcement, and the figures can serve as a yardstick against which progress in this field can be assessed.

What are the main findings of the 2015 Report on the VAT Gap?

During 2013, the overall VAT Total Tax Liability (VTTL) for the EU-26 Member States grew by about 1.2 percent, while collected VAT revenues rose by 1.1 percent. As a result, the overall VAT Gap in the EU-26 saw an increase in absolute values of about Euro 2.8 billion, to reach Euro 168 billion. As a percentage, the overall VAT Gap stayed constant at 15.2 percent. The median VAT Gap rose by 1.6 percentage point and was 13.9 percent.

In 2013, Member States’ estimated VAT Gaps ranged from the low of 4 percent in Finland, the Netherlands and Sweden, to the high of 41 percent in Romania. While 15 Member States including Latvia, Malta and Slovakia saw an improvement in their figures, 11 Member States such as Estonia and Poland saw deterioration.

Table 2.1 VAT Gap Estimates, 2012-2013 (million Euros)

What is the Policy Gap?

The 2015 Report also provides new and expanded evidence on the Policy Gap for the EU-26. The Policy Gap is an indicator of the additional VAT revenue that a Member State could theoretically collect if it applied standard rate to all consumption of goods and services supplied for consideration.

The Policy Gap as defined above can in turn be broken down into the Rate Gap and the Exemption Gap. As the terminology suggests, the Rate Gap represents the potential revenue loss due to the existence of reduced rates, whereas the Exemptions Gap represents the potential revenue loss due to the existence of exempted supplies of goods and services.

What are the main findings of the 2015 Report on the Policy Gap?

The Policy Gap in 2013 was higher than the VAT Gap, continuing a well-established trend. The Policy Gap ranges from the low of 27 percent in Slovakia and Bulgaria, to the high of 54 percent for Spain and Belgium. The EU-26 average Policy Gap is 42 percent, the median 43 percent.

The Policy Gap, in turn, can be broken down into the Rate Gap and the Exemption Gap. The latter, in all countries, is the larger of the two, ranging from the high of 43 percent for Finland, to the low of 22 percent for Lithuania. The EU-26 average Exemption Gap is 33 percent, as is the median. The Rate Gap, on the other hand, ranges from the low of 1 percent in the case of Denmark, to the high of 19 percent in Portugal. The average is 10 percent, and the median is 11 percent.

The results moderate views of the relative importance of reduced rates and exemptions in reducing the revenue potential of VAT, and suggest that better enforcement remains a key component of any strategy of improvement of the VAT system.

[1] http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat-gap.pdf

[2] http://ec.europa.eu/taxation_customs/resources/documents/common/publications/studies/vat_gap2012.pdf

MEMO/15/5593