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The VAT Gap in EU

By November 17, 2013July 10th, 2021No Comments

The VAT Gap is the difference between what should be collected and what is collected.  The bigger the gap, the more those of us who do pay our taxes have to pay, so it should be of interest to us all.

 

The VAT Gap is the difference between what should be collected and what is collected.  The bigger the gap, the more those of us who do pay our taxes have to pay, so it should be of interest to us all.

The VAT Gap across all 26 Member States of the EU in 2011 accounted for €193 billion, or 1.5% of GDP. This amounts to 18% of the theoretical VAT (i.e. all expected revenue).

Italy (€36 bn), France (€32bn), Germany (€26.9bn) and the UK (€19bn) 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 VAT Gap is defined as the difference between the expected VAT receipts if all the VAT which is due is collected and the actual VAT collected by Member States.  It is important to stress that the VAT Gap does not only relate to fraud and evasion, but also to legal tax avoidance, bankruptcies, financial insolvencies, miscalculations and the performance of tax administrations. For example, in the UK, 1/3 of the VAT Gap in 2009-10 was due to legal tax avoidance.

The UK VAT gap for 2010-11 (the latest year for which there are statistics) stood at £11.4bn or an incredible 10.4%.  To put that in perspective, we could probably go back to a 17.5% VAT rate if all the tax was collected.   The UK, which has quite strong measures in place to protect against contrived insolvency as a basis of avoiding VAT payment, some £1.8 bn arises from non-payment.  Over the EU, it is a higher proportion of the VAT gap, where newer member states found themselves under attack from contrived insolvencies.

We have prepared an Essential Guide on the measures taken in the UK to try to protect the revenue from repeated attack from contrived insolvencies.  Sadly the measures are also used against those unfortunate businesses that have found themselves in trouble, partly because HMRC does not always discriminate as carefully as they ought, and sometimes because, actually, the controls applied by HMRC are little different from credit control procedures applied by businesses.  If you would like a copy, please email help@covertax.co.uk.

Steve Botham,
Covertax Chartered Tax Advisers