VAT Gap in Europe 2025
The latest VAT Gap in Europe – Report 2025 by the European Commission reveals a renewed deterioration in VAT compliance across the European Union (considering data up to and including the year 2023), reversing the steady gains achieved prior to the COVID‑19 crisis. After several years of recovery, the VAT compliance gap climbed to €128 billion in 2023, representing 9.5% of the EU’s theoretical VAT Total Tax Liability (“VTTL”)— an increase from 7.9% in 2022.
This shift marks a clear turning point which after years of positive trajectory gives raise for concern. While the period from 2013 to 2021 was characterised by consistent improvement in VAT collection efficiency, the combination of the pandemic, inflationary pressures, supply disruptions and geopolitical shocks has weakened enforcement outcomes. Between 2021 and 2023, VTTL rose by 17.3%, but actual VAT revenues grew by only 14.4%, widening the compliance gap accordingly.
Large Differences Across Member States
Compliance performance varied sharply across the EU. Austria (1%), Finland (3%), and Cyprus (3.3%) recorded the lowest gaps, reflecting comparatively stable consumption, stronger administrative controls, or both. At the opposite end of the spectrum, Romania (30%) and Malta (24.2%) reported the largest shortfalls in 2023. Median Member State performance deteriorated as well, rising from 7.3% in 2022 to 8.2% in 2023.
EU candidate countries showed mixed outcomes: Georgia (5.4%) and Kosovo (8.1%) fell within the EU’s general range, while Albania (24.6%) performed more poorly. Ukraine’s available pre‑war estimate (2021) placed its compliance gap at 17.5%.
VAT Policy Gap Remains Structurally High
The study also highlights the VAT policy gap, capturing forgone revenue from rate reductions, exemptions and other policy choices. In 2023, the EU’s policy gap reached 50.5% of notional ideal revenue, with 12.3% attributable to reduced or zero rates and 38.3% to exemptions. Most of this shortfall—23.3%—comes from non‑actionable components such as public‑sector activities and imputed rents. National policy‑driven exemptions add a further 11.4%, while EU‑mandated exemptions account for 3.6%.
The policy gap varies widely: Spain (59.1%) and Greece (57.1%) record the largest gaps, while Bulgaria (33.6%), Latvia (34%) and Lithuania (35.6%) sit at the lower end.
Economic Conditions Shape VAT Performance
The period 2019–2023 saw the EU economy buffeted by major disruptions. Growth slowed to 0.3% in 2023, and inflation—though down from 2022 peaks—remained elevated. VAT revenues rose only 3.5% in 2023, well below inflation, indicating a real decline in collection efficiency. Candidate countries grew faster, averaging around 4% real GDP growth, but with notable volatility, especially in Moldova and Ukraine.
These macroeconomic forces contributed to shifts in consumption patterns and compliance risks. For example, weakened consumer spending, reduced digital payment growth, and rising bankruptcies collectively increased the likelihood of non‑reported transactions.
Policy Responses and Administrative Reforms
The report further documents significant tax policy changes during 2023–2024. Member States gradually phased out pandemic‑ and energy‑crisis‑related VAT reductions, although several extended relief measures—particularly zero‑rating of essential goods or renewable‑energy equipment, remained.
Compliance measures also intensified. Poland introduced VAT groups; Belgium expanded limitation periods for audits; Malta tightened reporting obligations; and several Member States advanced e‑invoicing and e‑reporting frameworks. These reforms are expected to support medium‑term collection efficiency but have yet to reverse the recent increase in the EU‑wide VAT gap.
A System Under Pressure
Overall, the 2025 VAT Gap analysis (with data up to and including 2023) underscores a dual structural challenge: non‑compliance costs remain large and rising, while policy‑driven revenue losses remain far higher than evasion‑related losses. With the EU’s VAT system facing mounting economic and administrative pressures, the report suggests that both improved enforcement and a reassessment of VAT policy design, particularly exemptions and rate reductions, will be required to restore revenue performance.