Partner Article

Mind the (VAT) Gap – are our zero rates on the way out?

The European Commission has recently published the findings of a report it commissioned on the ‘VAT Gap’, which is defined as the difference between the expected VAT receipts (assuming all VAT due is collected) and the actual VAT collected by Member States.

The VAT Gap has been calculated at €193 billion across the EU which represents 17% of the theoretical VAT due. Italy (€36bn), France (€32bn), Germany (€26.9bn) and the UK (€19bn) contributed to over half of the total VAT gap.

The VAT Gap arises from non-compliance and tax avoidance although interestingly the Commission refers to the concept of legal tax avoidance and advises that in the UK, for example, 1/3 of the VAT Gap in 2009/10 was due to legal tax avoidance - a fact that will surely not slip past Ministers unnoticed (grande skinny latte anyone?).

Not surprisingly, the study showed that the VAT gap increased in many countries in line with the recession and financial crisis with Spain, Greece, Latvia, Portugal and Slovakia showing the highest increase in the VAT Gap since 2008.

A more worrying aspect in the report was comment on the ‘Policy VAT Gap’. This considers the increase in VAT revenues that would be collected by Member States if they applied a uniform taxation policy to all consumption (i.e. removed reduced rates and exemptions).

Using this measure, the VAT gap is approximately 36% across the EU - twice as high as the VAT Gap. This, in the view of the Commission, shows that the most important loss of VAT revenue is not in fact due to non-compliance or avoidance (VAT Gap), but due to policy choices which have resulted in multiple rates and exemptions in national tax systems.

This concept is not new, but adds fuel to the fire. The EC has already indicated that the UK faces challenge over its retention of zero rates. Will we start seeing VAT on our food, books, newspapers etc?

This was posted in Bdaily's Members' News section by Baker Tilly .