European Union Member States lost out on a total of €61 billion in VAT payments in 2021, according to the European Commission VAT Gap Report 2023 released on 24 October.
The study said that was mainly due to VAT fraud, evasion and filing mistakes.
The VAT gap – the difference between countries’ expected VAT revenue and the amount they actually collected – was highest in Romania, where 36.7 per cent of VAT due went uncollected, while it was 27 per cent in Malta. On average, EU countries missed out on 5.3 per cent of the VAT they expected.
Lost VAT revenues meant governments had less capacity to fund services such as schools, hospitals and transport, while also increasing the burden on law-abiding businesses.
Hungary, Italy, and Spain showed “big improvements in imposing very tough digital VAT reporting requirements on businesses”, Richard Asquith, CEO of Brussels tax tech company VatCalc, told Brussels Signal.
These new requirements – such as e-invoicing and real-time reporting – helped those countries collect more VAT but were “expensive for companies” and required “major new investment” in new accounting systems to cope, he said.
An EU VAT manager at a large UK multinational, who asked not to be named, said: “I do question however whether these measures will just end up placing a greater burden on already compliant businesses, whilst having negligible effect on fraudulent ones.”
Such measures also added cost into the supply chain, while “implementation dates are postponed at last minute and there is a lack of consistency in approach across member states”, said the VAT manager.
Karol Gotfryd, a Polish investor, said in terms of improvement, Poland had tightened its VAT gap the most in Europe, “from the level of African countries in 2013 to an AA economy right now”.
Zoltan Kovacs, international spokesman in Hungarian Prime Minister Viktor Orbán’s office, said Hungary’s unpaid VAT decreased from 22.3 per cent to 4.4 per cent from 2010 to 2021, “one of Europe’s largest economic whitening efforts”.
A policy of efficiently collecting taxes rather than increasing them had “reduced tax evasion, benefiting honest businesses”, Kovacs argued.
Elsewhere, the gap report found that Finland only missed out on 0.4 per cent of expected VAT, while the Netherlands actually collected 0.2 per cent more than it had expected.
Asquith said the EU VAT gap had “dramatically halved” from €140 billion in 2019 to €61 billion in 2021 – but much of this was due to Covid.
A more lasting trend was towards electronic payments and online shopping, where the rate of VAT compliance was generally much higher, he added.
The European Public Prosecutor’s Office (EPPO), with powers to investigate serious cross-border VAT fraud, had also increased its efforts to combat that.
In June, it cracked down on €19 million in VAT fraud involving car sales in France and the Netherlands.
A Dutch tax lawyer who did not want to be named, said there were “some concerns by businesses about the route the EPPO has been taking lately to go after Big Tech companies”.
These investigations included an ongoing €870 million tax investigation of Facebook-owner Meta that the EPPO had passed to Italy earlier this year.
The European Commission’s answer – its VAT in the Digital Age proposals – is currently under discussion in the European Council.
These involve a cross-border digital reporting system for all business-to-business transactions.
Implementing these proposals was “unlikely” before 2030, said Asquith.