According to a recent report from the European Commission, VAT compliance across the EU declined in 2022. The "VAT Gap" report indicates that the VAT compliance gap rose from 6.58 percent in 2021 (€76 billion) to 6.99 percent in 2022 (€89 billion). The gap represents potential revenue lost due to non-compliance with VAT rules.
The largest compliance gaps were noted in Romania at 30.6 percent, followed by Malta at 25.9 percent, and Lithuania and Slovakia both at 14.6 percent. Conversely, Hungary had one of the smallest gaps at 2.3 percent, alongside Cyprus, Portugal, and Ireland.
The European Commission's findings show an increase in the VAT compliance gap for 15 EU countries in 2022 while it decreased in 11 others and remained unchanged in France. Factors contributing to this trend include VAT avoidance, enforcement issues, unpaid taxes due to bankruptcies or insolvencies, and legal tax optimization.
Bankruptcy data shows a correlation between increased bankruptcies and decreased compliance; however, some countries like Greece, France, and Hungary saw higher bankruptcy rates yet improved VAT compliance. The overall decline is attributed to growth in the service sector and tourism as well as rising bankruptcy declarations.
In addition to the compliance gap, the report highlights a significant policy gap stemming from reduced rates and exemptions that result in further revenue losses. The actionable policy gap was recorded at 19 percent for the EU—12 percent due to reduced rates and seven percent attributable to exemptions.
Countries like Poland (33.4 percent), Spain (29.3 percent), Greece (28.4 percent), Italy (26.2 percent), Portugal (22.2 percent), Cyprus (21.9 percent), Luxembourg (21.3 percent), and Slovenia (21.1 percent) have high actionable policy gaps indicating substantial lost revenue potential.
The report suggests that without new rate reductions on energy and food products after temporary measures expire, there could be a reduction in both the rate gap and actionable policy gap moving forward into 2023 and 2024.
Policymakers are urged to address these gaps as VAT remains a significant barrier for businesses within the EU single market according to a survey where it ranked first among business challenges at 17%.
