The study on the ‘VAT gap’ (82 page / 1.6MB PDF) prompted the commission to call on member states to accelerate a planned programme of reform designed to cut down on VAT fraud within the EU system.
The VAT gap had increased in the UK and the UK was one of six countries to have seen a rise in its VAT gap in 2016 – the others being Romania, Finland, Ireland, Estonia, and France. In June this year HM Revenue & Customs published figures showing that the tax gap in the UK had risen to £33bn in 2017/18, with the largest portion of unpaid tax attributed to companies’ failure to take reasonable care over their tax liabilities.
Tax law expert Catherine Robins of Pinsent Masons, the law firm behind Out-Law.com, said the UK was already seeking to cut down on its tax gap.
“The UK has introduced a raft of measures designed to cut down on non-compliance by overseas traders, especially those based in China, selling goods online to UK customers. These include making online marketplaces jointly and severally liable for the VAT in some circumstances,” Robins said.
“The UK is also trying to cut down on VAT missing trader fraud in the construction sector. From 1 October 2019 a VAT reverse charge will apply, making construction businesses pay the VAT element direct to HMRC rather than to those supplying construction services to them,” Robins said.
The European Commission said the gap between the VAT which states expected to collect, and the actual amount collected, decreased in nominal terms by €10.5bn to €147.1bn in 2016, a drop to 12.3% of total VAT revenues compared to 13.2% the year before.
The VAT gap decreased in 22 member states. Bulgaria, Latvia, Cyprus, and the Netherlands reported a decrease in each case of more than 5 percentage points in VAT losses.
The commission said estimated VAT gaps ranged from 0.85% in Luxembourg to 35.88% in Romania. Overall, half of the EU member states recorded a VAT gap of less than 9.9% in 2016.
Variations reflected differences in the ways countries deal with issues such as tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration.
The VAT gap covers tax lost due to fraud and evasion as well as insolvencies, bankruptcies and administrative errors.
Last year the European Commission published plans for a new EU VAT system. The proposals included more simple and harmonised rules making it easier for companies to do business across borders, although they did not seek to harmonise the VAT rates charged by individual member states. They are yet to be voted on by member states.