2020 estimate of lost EU VAT shows €31bn improvement largely due to COVID-19 effect
The European Union member states are estimated to be losing €93bn billion per annum in Value Added Tax revenues based on the European Commission’s (EC) latest ‘VAT Gap’ estimate. This is 9.1% of VAT revenues. The comparable 2019 VAT Gap was €124 billion (excluding the UK). Much of this reduction is due to the economic effects COVID-19 pandemic.
COVID results in €69bn contraction of EU VAT revenues
19 of the 27 member states suffered a drop in VAT revenues due to the COVID-19 pandemic. . The total EU VAT tax was down €69bn to €1,021bn. This, and the VAT cuts introduced by most members states, contributed to the VAT Gap reduction.
The VAT Gap seeks to estimate the difference between tax forecasts and actual receipts. Losses are down to:
- liquidations of companies owing VAT;
- tax authorities administrative inefficiencies
- lawful VAT structure optimisation; and
Big reductions in Hungary, Germany, Netherlands and Greece
The most significant decreases occurred in Hungary (4.7 pp), Germany (4.2 pp), the Netherlands (4.1 pp), and Greece (3.7 pp). Such positive changes in compliance during the pandemic-induced recession might have been partially caused by the support measures, themselves contingent on paying taxes and reducing the frequency of bankruptcies.
Italy retains the position of largest VAT gap at €26.2bn, which is 28% of all missing EU VAT.
The VAT compliance gap increased year-over-year in only six Member States – Croatia, Cyprus, Ireland, Romania, Austria, and Belgium
Whilst a good improvement, this would still take 13 years to wipe out the gap at this rate of improvement. Last year’s VAT Gap report warned of a likely heavy loss due to the economic effects of COVID-19.
The European Commission Taxud launched a EU VAT Gap Initiative in 2022 to help exchange ideas between EU member states’ tax administrations to help close the gap.
ViDA proposals on e-invoicing and digital reporting to close gap further
The EU proposals for VAT in the Digital Age, which will include intra-community digital reporting requirements and e-invoicing to help drive down this gap further.