The European Commission recently published its annual ‘VAT gap’ report for 2013 data. The ‘VAT Gap’ is a measure of VAT enforcement and compliance effectiveness. It calculates revenue loss due to fraud and evasion, bankruptcies, tax avoidance, miscalculations and financial insolvencies across the EU countries. The VAT Gap study is based on a top-down approach and won’t easily lend itself to analysis across industrial or professional sectors. It is more suited to analysis of how different EU countries perform over time.

2013 saw continuing unfavourable economic conditions, as the EU’s GDP was almost stagnant. This contributed to a slowdown of final consumption and of other economic aggregates that form the basis of the Value Added Tax. Six countries applied changes to standard or reduced rates in 2013. The results show less emphasis on the importance of reduced rates and exemptions in reducing the revenue potential of VAT. The report suggests that better enforcement should be at the heart of strategies to improve the VAT system.