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This article has been updated to reflect the European Commission’s most recent VAT gap report (2025 edition), which provides the latest analysis on the difference between VAT legally due and VAT actually collected for the year 2023. The report also introduces, for the first time, an assessment of the VAT policy gap, the revenue foregone due to reduced rates and exemptions, providing a more comprehensive understanding of total VAT losses across EU Member States.
What is the VAT gap?
The VAT gap is the difference between the VAT submitted and the VAT collected. The difference is caused by a number of factors - the main one being tax fraud. Fraudulent invoices are submitted to the tax authority, in order to claim VAT that does not exist.
VAT gap estimates are crucial for revealing the extent and nature of lost VAT revenue due to non-compliance and rule design. They offer valuable insights for informed policy decisions and improvements to tax administration, shedding light on strategies to enhance VAT collection efficiency.
The VAT gap exists all over the globe, and is currently an issue for many European Member States who have VAT gaps into the millions, and in some cases billions, of Euros.
Any loss in VAT causes a big impact on national budgets. In 2021, the contribution of VAT accounted for approximately 27% of the total yearly tax receipts for the general government in the EU². Countries and their tax authorities cannot plan their spend on public services if the VAT they are expecting does not equate to the VAT they receive.
This is why many countries are putting in a lot of time and effort to ensure they close their VAT gap.
In the most recent editions of the European Commission’s VAT Gap analysis, the concept of the VAT gap has been further refined by clearly distinguishing between two components.
The VAT compliance gap refers to revenue losses resulting from non-compliance with VAT rules, including fraud, evasion, insolvency and administrative errors.
In parallel, the Commission now also estimates the VAT policy gap, which measures the revenue foregone as a result of policy choices such as reduced VAT rates, exemptions and special regimes, compared to a hypothetical “ideal” VAT system applying a uniform rate with no exemptions.
This distinction makes it possible to separate revenue losses linked to enforcement and compliance issues from those arising from deliberate tax policy design.
History of the EU VAT gap report
Each report analyses the VAT gap using data from two years before its publication, as the necessary data for a comprehensive report on the previous year is not available when the report is released.
Therefore, the first report, published in 2009, examined the VAT gap in 25 EU Member States for the year 2007. The next report was in 2014, and thus every year since.
The report provides a breakdown of each Member State's VAT gap in both monetary terms and as a percentage of lost VAT revenue relative to the total VAT claimed by the Member State. These two sets of figures are crucial; the monetary value reveals the actual amount of VAT lost, which is crucial to overall EU figures. While the percentage illustrates each country's proportionate representation of how much VAT they expect to receive.
Key findings from the VAT gap report 2025 (data for 2023)
According to the European Commission’s VAT Gap report 2025, the estimated VAT compliance gap in the European Union for the year 2023 amounted to approximately €128 billion, corresponding to around 9.5% of total VAT liability.
This figure represents the difference between the VAT that should have been collected under full compliance and the VAT actually received by tax authorities across the EU.
The report highlights that, after several years of declining VAT gaps, the 2023 estimates indicate a reversal of the downward trend observed during the pandemic period, reflecting renewed compliance and enforcement challenges in a changing economic environment.
Which countries have made notable changes?
The VAT gap report 2025 reveals significant differences in VAT compliance levels across EU Member States in 2023, highlighting both persistent challenges and strong performers.
Romania recorded the highest VAT compliance gap in relative terms, with an estimated 30.0% of VAT liability not collected. Malta followed with a compliance gap of approximately 24.2%, indicating continued structural and administrative challenges.
Several Member States reported compliance gaps above the EU average, including Poland, where the VAT compliance gap was estimated at around 16.0% of total VAT liability.
In contrast, a group of countries achieved particularly low VAT compliance gaps in 2023. Austria recorded the lowest estimated gap at approximately 1.0%, followed by Finland at around 3.0%, reflecting high levels of compliance and effective tax administration.
These results underline the uneven distribution of VAT compliance performance across the EU and demonstrate that, while some Member States maintain very high collection efficiency, others continue to face significant challenges in closing their VAT compliance gaps.
Understanding the VAT policy gap
In addition to the VAT compliance gap, the European Commission now also analyses the VAT policy gap, which captures the impact of tax policy choices on potential VAT revenue.
The VAT policy gap measures the difference between the VAT that would be collected under a hypothetical “ideal” VAT system, applying a uniform rate to all final consumption with no exemptions and the VAT that is actually expected to be collected under the current VAT rules in force.
According to the VAT gap report 2025, the VAT policy gap in the European Union was estimated at 50.5% in 2023. This indicates that more than half of the potential VAT revenue is foregone due to reduced rates, exemptions and other policy-driven deviations from the ideal VAT system.
Unlike the VAT compliance gap, the policy gap does not reflect fraud or enforcement failures, but rather the revenue impact of deliberate legislative and policy decisions made by governments.
Extension of VAT gap analysis to EU candidate countries
For the first time, the European Commission’s VAT gap analysis has been extended beyond EU Member States to include selected EU candidates and potential candidate countries. This methodological expansion aims to provide a broader comparative perspective on VAT compliance levels and administrative effectiveness.
Based on the 2025 report’s estimates for 2023, the VAT compliance gap was assessed at approximately 5.4% in Georgia, 8.1% in Kosovo, and 24.6% in Albania.
While these figures are not directly comparable to those of EU Member States due to differences in tax systems and data availability, their inclusion marks an important step towards greater transparency and alignment in VAT gap measurement across Europe.
What are Member States doing to decrease their VAT gap?
Together with different tax incentives (i.e. reduced tax rates), many countries have either initiated, or are initiating, mandatory electronic invoicing or electronic reporting. Mandatory e-invoicing or e-reporting can help close the VAT gap when guided by the right procedures.
Electronic invoicing
Firstly, an electronic invoice created in a structured electronic format reduces errors and inconsistencies that paper invoices may possess.
Accurate invoicing is pivotal in ensuring precise VAT calculations. The implementation of e-reporting empowers tax authorities to more accurately assess VAT information, monitor economic performance and trends, and identify discrepancies, errors, and fraud at an early stage. While an e-reporting requirement is often associated with an e-invoicing mandate, it can also function independently.
Romania, despite sharing similarities with other Member States in the macroeconomics situation and other fiscal measures, did not have a noticeable impact on the development of the VAT compliance gap. Until 2022, Romanian VAT payers were not obligated to report transactional data, a contrast to Latvia, Hungary, Poland and Slovakia. This absence likely impacted tax enforcement effectiveness adversely. In addition the country is rolling out a large-scale e-reporting and e-invoicing mandate commencing on the 1st of January 2024.
Government platforms
Secondly, many tax authorities have introduced a government platform within their e-invoicing regulations. Each country’s platform and regulation model performs differently, but essentially their core objective remains the same - preventing the circulation of fake, or fraudulent, invoices.
Some countries, such as Turkey and Italy, require the invoice to be cleared by the government platform before reaching the recipient. Whereas some countries, like France in the near future, require the e-invoice service provider to “feed” the invoice information directly to the tax authority’s platform on behalf of the customer.
Whichever model adopted by a country, all models work toward the common goal of mitigating VAT fraud and illegitimate VAT claims - thus helping to close the VAT gap.
Additional insights from the mind the gap 2025 report
In addition to measures such as mandatory e-invoicing and e-reporting, the Mind the Gap 2025 report outlines several actions recommended to reduce tax gaps across EU Member States:
“Build Estimation Capacity: strengthen tax administrations with skilled teams and robust data systems to enable regular tax gap estimates across tax types.”
“Review Past Policy Choices: monitor, evaluate and report tax policy-induced gaps, such as tax reliefs or concessions, to ensure they serve their purpose and deliver value for money.”
“Systematic Reporting and Evaluation: implement regular tax gap reporting to build public trust and guide targeted strategies.”
“Adopt Common Frameworks: harmonise methodologies for tax gap estimation among Member States to ensure consistency and comparability across the EU.”
“Invest in Tax Collection and Recovery: automate, digitise, and integrate IT systems; link with other stakeholders to improve tax collection and recovery of overdue taxes, including disputed debts.”
“Leverage Digitalisation and Cooperation: accelerate digitalisation (e.g., AI) and international cooperation (e.g., DAC 1–9) to enhance compliance. Reforms such as VAT in the Digital Age (ViDA) support e-invoicing, real-time reporting, and cross-border data matching.”
These policy-oriented actions complement digitalisation efforts such as mandatory e-invoicing, helping to address both the compliance gap and indirectly the policy gap, and supporting more effective VAT collection across the EU.
Which countries have already introduced mandatory electronic invoicing?
Many countries around the globe, from Mexico to Australia to Japan to Serbia, have already implemented mandatory electronic invoicing processes.
More and more European countries are announcing their e-invoicing intentions - B2G e-invoicing is becoming the norm and B2B e-invoicing is on the horizon.
Italy and Serbia already have B2B regulations in place. In 2024, Romania, Poland and Spain will begin their B2B mandates. The trend will continue into Latvia, Germany, France and Belgium, all of whom have already announced similar intentions.
Staying up to date
Keeping up to date with the VAT gap is one challenge, but staying up to date with the mandatory regulations can be more difficult.
With Banqup Group, you can rest easy knowing our team of e-invoicing and e-reporting experts are doing the work for you. We update our tax compliance and e-invoicing guide on a regular basis, and ensure our customers have the most up to date compliance information and processes they need.
Stay up to date with the latest VAT compliance insights and regulations by subscribing to our monthly tax compliance newsletter and following us on LinkedIn.
For detailed information, the European Commission’s VAT gap report 2025 provides a comprehensive analysis of the compliance gap, policy gap, and the first-time coverage of EU candidate countries. The report includes full country breakdowns, methodology notes, and key recommendations for reducing VAT gaps.
You can access the full report, an executive summary, and a factsheet here: Mind the Gap Report 2025