Value added tax (VAT) is one of the most important sources of revenue for EU Member States. Nevertheless, for many years there has been a significant discrepancy between the VAT that should theoretically be collected and the amounts actually received — the so-called VAT Gap. The European Commission’s VAT Gap Report 2023 clearly shows that this gap remains a major fiscal challenge.
What is the VAT Gap?
The VAT Gap describes the difference between the VAT revenue that would be expected if all taxpayers fully complied with VAT rules and the VAT actually collected. It consists of two components:
- the compliance gap, resulting from VAT fraud, insolvencies, errors, or late filings, and
- the policy gap, which arises from political decisions such as VAT exemptions or reduced VAT rates.
Key Findings of the 2023 Report
According to the report, the EU-wide VAT compliance gap amounted to approximately €128 billion in 2023, representing around 9.5% of potential VAT revenues. This marks a slight increase compared to the previous year, following several years of decline. At the same time, the policy gap remains very high: more than half of the theoretical VAT base across the EU is affected by reduced rates and exemptions.
Significant differences exist between Member States. Countries such as Austria and Finland report comparatively low VAT gaps, while others — including Romania and Malta — continue to face very high compliance gaps. Germany’s VAT gap is close to the EU average.
Why Does the VAT Gap Matter?
A high VAT gap leads to substantial revenue losses for public budgets and directly affects the funding of public services. It also causes distortions of competition, as compliant businesses are placed at a disadvantage compared to non-compliant market participants. For businesses themselves, inadequate VAT compliance increases the risk of additional tax assessments, interest charges, and tax audits.
Causes and Solutions
The reasons for the VAT gap are diverse. In addition to deliberate VAT fraud, complex cross-border business models, administrative weaknesses, and unintentional errors play a significant role. To address these issues, both the EU and Member States are increasingly focusing on digitalisation and modernisation of VAT systems.
In particular, the reform initiative “VAT in the Digital Age (ViDA)” aims to reduce VAT losses by introducing e-invoicing requirements, digital reporting systems, and new rules for online platforms, thereby increasing transparency. Complementary measures include targeted audits, enhanced cooperation between tax authorities, and greater awareness of VAT compliance obligations among businesses.
Conclusion
The VAT Gap Report 2023 demonstrates that, despite measurable progress, significant action is still required. Digitalisation, clear legal frameworks, and robust VAT compliance will be key to reducing VAT revenue losses and ensuring fair competition across the European Union.
