Mind the (VAT) gap

09 February 2017

David Wilson

VAT is a major and growing source of tax revenue in the EU, but a report issued last year highlights that member states in the European Union are losing billions of euros in VAT revenues because of tax fraud and inadequate tax collection systems.

The VAT gap is the overall difference between the expected VAT revenue and the amount actually collected, and the report highlights that, in 2014, the VAT gap across the EU amounted to €159.5bn, equating to a loss of 14 per cent of expected VAT revenues.

Overall, half of the EU member states recorded a VAT gap below the 10.4 per cent EU median. But, so concerning is the occurrence of VAT fraud, that the European Commission has put forward a proposal to allow member states to expand the domestic use of a VAT reverse-charge mechanism which would shift the liability for declaring VAT from the supplier to the consumer.

The application of this Generalised Reverse-Charge Mechanism (GRCM) would be subject to predefined conditions relating to the member state’s VAT gap, and would apply to all goods and services with an invoice threshold of more than €10,000. The proposal has however met with some opposition from delegates at the recent ECOFIN meeting; it therefore remains to be seen whether it will be implemented.

From the latest figures released by HMRC, the UK preliminary estimate of the VAT gap for the period 2015-16 is 10.3 per cent; as this is below the EU median, the UK would not currently be eligible to apply the GRCM. Countries within the VAT territory of the EU which currently do meet the initial qualifying condition of 5 per cent above the EU median, and which therefore may seek to apply the GRCM, are: Bulgaria, Czech Republic, Greece, Italy, Latvia, Lithuania, Hungary, Malta, Poland, Romania and Slovakia; it is possible that Cyprus and Croatia would also qualify but unfortunately no figures are available to confirm. 

What is interesting is that, of those 11 states who qualify for GRCM, the Czech Republic, Greece, Italy, Latvia, Lithuania, Hungary, Malta, Poland and Slovakia have actually reduced their respective VAT gap in the period reported.

Whilst there has been an overall downward trend in the UK VAT gap from 14.5 per cent in 2005-06, the current UK VAT Gap of 10.3 per cent in 2015-16 does amount to some £13.2bn of potentially lost VAT revenues for the period 2015-16, an increase of £0.5bn in the last year alone.

For more information please get in touch with David Wilson, or your usual RSM contact.