VAT Gap: Progress made in VAT compliance in 2021, though losses remain considerable

This year’s report covers 2021 and shows that Member States lost around €61 billion in VAT in that year, compared to €99 billion in 2020.

This figure represents revenues lost mainly to VAT fraud, evasion and avoidance, non-fraudulent bankruptcies, miscalculations and financial insolvencies, among other drivers.

This progress in enforcing VAT compliance is welcome since lost VAT revenues can have an extremely negative impact on governments’ capacity to fund the public goods and services upon which we all depend, such as schools, hospitals and transport.

Main results in 2021 

In nominal terms, the overall EU VAT Gap decreased by around €38 billion, from €99 billion in 2020 to €61 billion in 2021, an unprecedented improvement on previous years. A number of Member States such as Italy (-10.7 percentage points) and Poland (-7.8 percentage points) recorded particularly notable reductions in their national VAT Gap figures.

The 2021 report shows that targeted policy responses made a difference, particularly those related to digitalisation of tax systems, real-time reporting of transactions and e-invoicing. At the same time, temporary factors such as government support measures implemented during the COVID-19 pandemic, which were often contingent on paying taxes, may also have played a role in driving this positive change.

Aside from some specific effects caused by the COVID-19 pandemic, the unprecedented uptick in VAT collection and decrease in the overall VAT Gap in most Member States could be explained by a variety of factors. First, electronic payments and online shopping, where the rate of VAT compliance is generally much higher, have grown in popularity since the COVID-19 pandemic. Second, Member States are reaping the benefits of targeted measures put in place in their domestic tax systems such as new digital reporting tools, the real-time tracking of transactions, and e-invoicing regimes which are particularly effective against criminal VAT fraud.

As part of the 2022 VAT in the Digital Age proposals, currently under discussion between Member States in the Council, the Commission has notably put forward plans for a move to a cross-border digital reporting system based on e-invoicing for business-to-business transactions. The new system would make sure that Member States’ authorities are fully informed of transactions in almost real time, allowing them to immediately address instances of VAT fraud, especially missing trader or carousel fraud.

The 2023 VAT Gap report can be downloaded here.

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