Louise O'Reilly
Question:419. Deputy Louise O'Reilly asked the Minister for Finance what domestic actions he plans to take to reduce Ireland's VAT gap; and if he will make a statement on the matter. [18110/23]
View answerTuesday, 18 April 2023
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The VAT gap is an estimate comparing a maximum theoretical tax liability (approximated from economic activity in a country) against actual VAT collected. A tax gap can arise for many reasons, including non-compliance but also due to legitimate tax optimisation, insolvencies, bankruptcies and economic activity not fully captured in National Accounts data.
Since 2009, the European Commission has engaged consultants to estimate the VAT gap in each EU Member State and the EU as a whole. Given its nature, a tax gap cannot be easily or reliably measured. It must be estimated on the basis of limited data and making a significant number of assumptions. While Ireland continues to engage with the Commission on this topic, I am advised that Revenue has concerns around the robustness of the methodology and data used and the accuracy of the results.
Despite these concerns, it is useful to note the overall trends. Ireland’s VAT gap is estimated at 12.5% for 2020 in the most recent study (published in 2022), up from 10.3% for 2019. From an EU perspective, the average VAT gap is estimated at 9.1%, with Ireland ranking as the 8th highest across Member States.
As well as the main VAT gap, the Commission also estimates the policy gap (an indicator of the additional VAT revenue that a Member State could theoretically generate if a uniform VAT rate applied with full tax compliance on all goods and services). Components of the policy gap include the loss in VAT liability due to the application of reduced rates or exemptions.
The Commission’s consultants estimate that Ireland has a 51.9% measure for the policy gap, implying that VAT revenues would increase by 51.9% with the application of a uniform VAT rate to items that are exempt or zero rated, e.g. the provision of medical services, education, food, children's clothing and footwear, etc. The EU average is 45.7%.
The VAT policy gap does not provide a detailed breakdown of the costs within each VAT rate or for VAT exempt activities. Essentially the policy gap measures the total revenue that would be collected if the standard VAT rate was applied to the supplies of all goods and services. For example, I am informed by Revenue that if the standard rate of VAT was applied to the supply of all zero-rated food items, the potential VAT revenue yields would be in the region of €1.6 billion.