Not all is well in the finances of the European Commission. VAT collection is important for the Commission, because the Member States’ contributions to the budget of Commission is partially measured on the VAT revenue in that Member State.
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.
And not every country is equally diligent in collecting VAT. Countries like Romania and Lithuania are high on the naughty list, and larger economies like Italy is a (very!) bad apple as well.
Imagine a country that is unable to collect one-third of its indirect tax revenue – Italy has a VAT Gap of 48 BILLION Euro, which is more than the gaps in the UK and Germany together. Germany’s gap of 24 billion Euro is a good reason to worry.
The only reason for the UK’s relatively minor gap (15 billion Euro) is the relatively extensive use of zero-rates and reduced rates on UK sales of goods.
Remember: the VAT gap is created by lack of audits and enforcement, and straight-forward non-payment and tax fraud by domestic businesses.
Pierre Moscovici, Commissioner for Economic and Financial Affairs, Taxation and Customs said: “This important study highlights once again the need for further reform in VAT collection systems across the EU. I urge Member States to take the steps needed to fight tax evasion and tax fraud at all levels. This remains a burning issue and is at the top of this Commission’s agenda.”
The entire report (a rather dry write-up of macro-economical stats) is here for your download pleasure.