EU VAT gap likely to be impacted by COVID-19

There’s a huge difference between expected revenues in EU Member States and the revenues actually collected. The coronavirus pandemic isn’t making it easier to shrink this gap. 

Fighting tax fraud and evasion remains a top priority for EU member States struggling to shrink a growing Value-Added Tax (VAT) gap, which represents the difference between expected VAT revenues and VAT collected. The economic fallout as a result of Covid-19 is making it harder to reverse this trend.

The situation is explained in the European Commission’s Study and Reports on the VAT Gap in the EU-28 Member States (2020 Final Report). In total, EU countries lost an estimated EUR 140 billion in VAT revenues in 2018. There are, however, some disparities among Member States. For example, the estimated VAT gaps ranged from 0.7 % in Sweden, to 33.8% in Romania. The smallest gaps were in Sweden (0.7 %), Croatia (3.5 %) and Finland (3.6 %). The largest were recorded in Romania (33.8 %), Greece (30.1 %) and Lithuania (25.9 %).

For 2020, the report forecasts a potential loss of EUR 164 billion, because of the effects of the coronavirus pandemic on the economy. What’s more, if the EU economy contracts by 7.4 % in 2020 and the general government deficits raises, the gap could increase by 4.1 %.

“Today’s figures show that efforts to shut down opportunities for VAT fraud and evasion have been making gradual progress – but also that much more work is needed. The coronavirus pandemic has drastically altered the EU’s economic outlook and is set to deal a serious blow to VAT revenues too. At this time more than ever, EU countries simply cannot afford such losses. That’s why we need to do more to step up the fight against VAT fraud with renewed determination, while also simplifying procedures and improving cross-border cooperation,” Paolo Gentiloni, European Commissioner for Economy, was quoted as saying. 

Reforming the EU VAT system
Solutions to improve the VAT Gap have been listed in the Commission’s proposal to reform the EU VAT system:

• VAT will be charged on cross-border trade between businesses; 
• Traders will be able to make declarations and payments using a single online portal according to the same rules and administrative templates as in their home country;
• The final amount of VAT will always be paid to the Member State of the final consumer and charged at the rate of that Member State;
• Invoicing rules will be simplified.

The EU tax package recently published proposes also solutions to help boost VAT compliance.

How is VAT paid and collected in the EU?
Learning about VAT is easy on the TAXEDU portal. Teachers looking for activities aimed at helping students understand the concept can show this micro-learning clip starring 2QT! 

Teachers and students can also browse other digital resources on the TAXEDU website. There’s even an entire lesson plan What happens if you don’t pay your taxes, which sheds light on the “shadow economy” and the consequences of tax evasion.