Digitalisation and real-time reporting ‘behind 38% reduction in VAT gap’

The digitalisation of tax has been identified as the driving force behind a 38% reduction of the VAT gapThe difference between the amount of VAT revenue due to a tax authority and the amount actually collected across the European Union (EU).

New data from the European Commission reveals member states recorded around €61 billion in lost VAT revenues in 2021 – down from €99 billion in 2020.

What is the VAT gap?

The VAT gap details the difference between the theoretically expected VAT revenues in EU countries and the actual amount of VAT collected. The gap is created by activities such as VAT fraud, evasion and avoidance, miscalculations, insolvencies and non-fraudulent bankruptcies.

Increasing enforcement of VAT compliance is crucial as it ensures member states realise maximum revenues from indirect taxes; revenue that is typically used to fund critical public services such as schools, hospitals and transport.

Europe’s largest and smallest VAT gaps

The latest figures show the EU’s widest VAT gap is found in Romania, where the difference between VAT due and VAT collected is a huge 36.7%. This is followed by Malta (25.7%) and Lithuania (14.5%).

Across the EU as a whole, the gap is 5.3%.

At the other end of the table, the smallest VAT gap can be found in the Netherlands, which remarkably recorded a VAT gap of -0.2%. Other sub-1% VAT gaps were noted in Finland (0.4%) and Spain (0.8%).

The overall reduction of the EU VAT gap by €38 billion was an unprecedented success, with several factors contributing to this, including:

1. The post-Covid uptick in online shopping. E-payments are typically much easier to track and the rate of VAT compliance is higher than with traditional methods of sale.
2. A range of measures being put in place to digitalise domestic tax systems.

In relative terms, the member states that closed their national VAT gaps by the greatest amount in 2021 were Italy, which recorded a decrease of 10.7 percentage points, and Poland, by 7.8 percentage points.

How is digitalisation closing the VAT gap?

The European Commission has named the ongoing digitalisation of tax as an important factor behind the reduction of the VAT gap.

Over recent years, several key trends have become more widespread across the EU and member states are enjoying the benefits of these targeted measures:

• New digital reporting tax technology
• Real-time data tracking and analytics
• E-invoicing

High uptake of digital tools and systems – either through preference or mandating by authorities – has enabled greater access and visibility of tax data than ever before.

This has had a transformative effect for both tax authorities and businesses.

Tax authorities are now in a powerful position of being able to track transactions from source to submission – and crack down on cases of non-compliance. What’s more, the ability of authorities to access data to a microscopic level continues to dissuade more businesses from VAT fraud.

Businesses are enjoying unprecedented levels of accuracy and speed within their transactional reporting following the adoption of digital solutions; as well as an assurance of compliance that has previously been out of reach.

Coming next…

The proposed VAT in the Digital Age (ViDAViDA or 'VAT in the Digital Age', is an EU initiative proposed by the European Commission that seeks to modernise and harmonise VAT processes for member states, by embracing new technologies. It is aimed at updating processes for the management of VAT, and reduce the VAT gap and fraud. The proposal also aims to address challenges in the area of VAT raised by the development of the platform economy.) scheme, which is currently being discussed in the European Council, will mandate even more digital requirements across the EU.

It includes plans for a cross-border digital reporting system that will be based on e-invoicingElectronic invoicing - widely referred to as e-invoicing - is the exchange of a digital document between a supplier and a buyer. E-invoices are issued, transmitted and received in a structured data format that enabled automatic and electronic processing. They contain data in a machine-readable format so that an AP system can read an invoice without manual data entry, leading to faster and more efficient invoicing. for B2B transactions.

Under ViDA, tax authorities will have access to tax data in almost real time, meaning any instances of VAT fraud can be immediately identified and addressed.

The only way for businesses to remain compliant is to invest in the technology required to meet digital obligations and best practice not only of today, but also the future.