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EUROPEAN COMMISSION UNDERSTANDING THE VAT GAP: KEY QUESTIONS & ANSWERS Brussels, 11 December 2025 VAT Gap in Europe – report 2025 1. What is VAT? VAT (Value Added Tax) is a consumption tax applied to most goods and services sold in the EU. It is collected at each stage of the supply chain, but the final consumer ultimately bears the cost. Businesses: • charge VAT on their sales, • deduct the VAT they paid on their inputs, and • transfer the balance to the tax administration. EU rules (the VAT Directive) ensure a common framework, while each Member State is responsible for correct collection. VAT is crucial for financing national budgets and also contributes to the EU budget—making efficient VAT collection essential for public services and fiscal stability. 2. The VAT compliance gap What is the VAT compliance gap? It estimates the difference between the VAT that should be collected (if everyone complied with the rules) and what is actually collected. Losses may stem from: • VAT fraud and evasion, • avoidance or optimisation, • bankruptcies and insolvencies, • administrative errors, misreporting, or miscalculations. Important: It is an estimate, based on national accounts data. The VAT compliance gap is not a direct measurement of fraud. How is the VAT compliance gap estimated? The estimation is based on a harmonised, top-down consumption-side approach. The method has two steps: MEMO/22/XXXX  1. Estimate the VAT Total Tax Liability (VTTL) This is the theoretical VAT revenue if a Member State should collect if taxpayers fully complied. It is based on national accounts data (consumption, production, imports, exports), considering each country’s actual VAT rates and exemptions. 2. Compare VTTL with actual VAT revenues receipts. The difference between these two numbers is the estimate of the VAT compliance gap. Because the estimate depends on national accounts, later revisions to those data can lead to revisions of past VAT gap results. Why does the VAT compliance gap matter? It shows how well VAT is being collected in practice. It helps authorities understand: • the scale of fraud and evasion risks, • where administrative improvements are needed, • how economic changes affect compliance, • where policy or enforcement measures may be required. A rising compliance gap may signal weaknesses in enforcement, difficulties in collection, or shifts toward sectors with higher non-compliance risks. 3. The VAT policy gap What is the VAT policy gap? It measures how much VAT revenue is not collected because of policy choices, such as: • reduced or zero VAT rates, • exemptions from VAT. These are deliberate decisions, often for social, cultural, or economic policy reasons. How is the VAT policy gap estimated? The estimation follows three steps: 1. Estimate an “ideal” baseline with all consumption taxed at the standard VAT rate. 2. Calculate the VTTL, which already reflects the actual reduced rates and exemptions. 3. The difference between the baseline and the VTTL is the VAT policy gap. This gap is then broken down into components. 2 What are the components of the VAT policy gap? 1. VAT rate gap Revenue foregone by applying reduced or zero rates instead of the standard rate. Largest contributors: food, agricultural goods, hospitality. 2. National policy-driven VAT exemption gap Revenue forgone due to national decisions not to tax certain sectors (e.g. SME schemes, some financial services). 3. EU policy-mandated VAT exemption gap Revenue forgone because EU law requires certain exemptions (e.g. private healthcare, education, insurance). 4. Non-actionable VAT exemption gap The part of the policy gap that cannot realistically be reduced, because it comes from sectors structurally outside the VAT system, such as: • Imputed consumption (such as owner-occupied housing); • Non-market transactions (public goods and services without a market price, e.g., public administration, defence, etc.). These elements are inherently difficult or impossible to tax. (Note: The “non-actionable VAT policy gap” and “non-actionable VAT exemption gap” refer to the same concept.) What is the actionable VAT policy gap? The actionable VAT policy gap is the portion of the VAT policy gap that can, in principle, be addressed through policy changes. It consists of the three components that stem from discretionary policy choices: • the VAT rate gap, • the national policy-driven exemption gap, and • the EU-mandated exemption gap (reformable only through changes in EU legislation). It indicates how much revenue could theoretically be recovered if these policy choices were reconsidered., whether at national or at EU level. Why does the VAT policy gap matter? It helps policymakers assess: • which tax benefits are most costly, • which parts of the system national authorities can reform, • how VAT design affects long-term revenue, • the trade-offs between lower VAT rates and public finances. 3 The refined breakdown in the 2025 edition clarifies which portion of the VAT policy gap can be influenced at national level, and which portion is due to EU law, helping countries assess reform options. 4. General questions Why doesn’t the report include the very latest data released by some Member States? Why not wait until all outstanding data revisions are available before publishing the report? The report uses the latest data available at a fixed cut-off date (15 July 2025 for the 2025 edition) to ensure timely completion and publication. National statistics are frequently updated, often after the cut-off date. This is completely normal. Each year, the Commission revisits all inputs and revises past VAT gap estimates when necessary. All data sources and vintages are transparently documented. Why were past VAT gap estimates revised this year? Because national statistical institutes and Eurostat periodically revise national accounts to improve data accuracy, especially regarding completeness, exhaustiveness, and the informal economy. Such revisions may shift past VAT gap levels, but usually leave overall trends unchanged, thus confirming the robustness of the methodology. Why does the VAT compliance gap differ across countries? The size of the VAT compliance gap varies widely across countries because several factors influence how effectively VAT is collected: • Different levels of fraud and evasion: Some economies face more widespread undeclared activity or organised fraud than others. • Differences in tax compliance behaviour: Cultural, administrative, and sectoral factors shape how consistently businesses follow VAT rules. • Bankruptcies and insolvencies: Countries with higher business turnover or financial instability tend to show higher VAT losses. • Administrative capacity: The strength, resources, and digital maturity of tax administrations play a major role in detecting errors and preventing fraud. • Economic structure: Economies with a larger share of hard-to-monitor sectors (e.g. hospitality, construction, small service providers) naturally face higher compliance risks. • Statistical differences: Variations in how national statistics record consumption and the informal economy can influence the estimates. Importantly, more tax administrations are now monitoring their VAT compliance gap regularly. In recent years, 15 Member States have integrated VAT gap monitoring into their national processes, improving understanding of the drivers of these differences and helping administrations target action more effectively. What is being done at EU level to improve VAT compliance? The EU has strengthened cooperation and digital tools: 4 Cooperation and data analysis: • Eurofisc, a network of liaison officials of the 27 Member States, jointly processes and analyses data coming from rapid information exchange between Member States (among others through VIES, TNA). • The Transaction Network Analysis (TNA) tool detects suspicious cross-border transactions more quickly. Digital tools and e-commerce rules – modernising the system • The 2021 e-commerce VAT reforms closed the €22 small-parcel exemption, previously exploited for fraud. • CESOP (2024): payment services must report cross-border payments to help detect e- commerce fraud. • VAT in the Digital Age (ViDA), adopted in 2024, introduces real-time data reporting, wider e-invoicing, and updated rules for digital platforms 5. Missing Trader Intra-Community fraud (MTIC fraud) What is MTIC fraud? Missing Trader Intra-Community (MTIC) fraud is a specific and highly organised form of VAT fraud that exploits VAT-free cross-border trade within the EU. Under the EU VAT system, businesses can buy goods or services VAT-free from suppliers in other Member States. In MTIC fraud schemes, fraudsters: • buy goods VAT-free from another Member State, • sell them domestically and charge VAT to their customers, and • disappear without paying this VAT to the tax authorities. Because the trader “goes missing” with the VAT collected, the associated revenue loss is referred to as the MTIC gap. MTIC fraud can occur at large scale, often involving fast-moving goods such as electronics or services with high value and low physical footprint. How is the MTIC gap estimated in the report? The report builds on methodological work published in March 2024, which reviewed different ways to estimate MTIC-related VAT losses. The current estimation approach uses Intrastat trade data to detect irregularities and discrepancies that are typical of MTIC fraud schemes. The method has two key components: 1. Detection of anomalies in Intrastat data • Compare mirror trade statistics between Member States (e.g., what one country reports as exports versus what the partner country reports as imports). • Detect significant discrepancies that can signal the presence of MTIC fraud. • Use random forest machine-learning model to filter out anomalies caused by normal statistical variation, reporting errors, seasonal patterns or economic shocks, ensuring that only irregularities likely linked to fraud are considered. 5  2. Scope of the analysis • The estimates cover all Member States over a 14-year period (2010–2023), with the exception of Croatia for 2010–2012 due to missing data. • Two estimates are calculated: Lower estimate: conservative, including only product categories with known past MTIC cases. Upper estimate: broader, covering additional product categories that could plausibly be targeted by MTIC fraud. Together, these two estimates frame a reasonable range for the MTIC gap, acknowledging both the complexity of detecting this type of fraud and the inherent limitations of trade data. For more information Read the infographic on “VAT gap in Europe – report 2025” Discover the full study VAT gap in Europe – report 2025 and its executive summary. Watch the video: Results of the VAT gap analysis in 3 minutes Access our data hub for the full dataset More information on the DG TAXUD website on VAT gap in Europe and VAT in the Digital Age 6