What impact will Covid-19 have on Europe’s VAT gap?

Amid unprecedented economic downturn and record state spending in dozens of countries, governments across Europe could be forgiven for prioritising the accurate and effective collection of taxes more than ever before.

However, new statistics suggest many nations could be achieving quite the opposite, with the tax gap once again increasing year-on-year.

The European Commission recently revealed the tax gap in EU countries rose to €140 billion in 2018, up by €1 billion on 2017.

And it’s a problem that isn’t easing any time soon. With businesses failing in their thousands and miscalculations more likely due to the vast range of new measures introduced at short notice in response to Covid-19 – not to mention the existing threat of fraud and evasion – some believe the tax gap in 2020 could escalate.

Indeed, the Commission itself predicts there will be another huge increase to €164 billion this year. That’s a rise of more than 13% in uncollected tax.

With the size of the tax gap set to increase again, we predict governments across the EU and further afield will take steps to clamp down on non-compliance once the pandemic is over, possibly as early as 2021.

The UK, for example, borrowed £35.9 billion in August to tackle the economic fallout of Covid-19; £30.5 billion more than in August last year.

Meanwhile, it collected just £37.3 billion in taxes in August – £7.5 billion less than in the same month of 2019.

Such vast expenditure can’t continue indefinitely and closing the tax gap is a potentially pain-free remedy for governments in almost all countries.

We therefore advise businesses to get their house in order before it’s too late, ideally by investing in solutions that ensure 100% accuracy and compliance with local tax laws in every single transaction.

Fail to do so and your company could face an audit to examine every transaction you’ve made over several years; and the current size of the tax gap suggests there would be plenty of nervous business owners should that occur.