PLN 7.4 billion would have gone to Polish schools, hospitals or public transportation if not for the VAT gap. What exactly is it, what does it result from, and how do we compare to the European Union?

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What is the VAT gap?

In a nutshell, the VAT gap or hole is the amount of revenue that should have gone to the state but did not, primarily due to VAT fraud .

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Technically, the VAT gap is the difference between the VAT remitted and the VAT collected by the relevant state institutions. How does this happen? Fake invoices are submitted to the tax authority in order to obtain non-existent (and unpaid) VAT.

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This is a big and tangible problem, as any VAT loss has a real impact on national budgets. These are largely made up precisely of VAT: for example, in January-August 2023, the revenue of the Polish state amounted to almost PLN 374 billion. Of this, revenue from VAT amounted to as much as PLN 160.9 billion, and - for comparison - from PIT already "only" PLN 46.7 billion. 

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"Lost VAT revenues can have an extremely negative impact on the ability of governments to finance the public goods and services we all depend on, such as schools, hospitals and transport," the European Commission points out. In 2021, the VAT share accounted for about 27% of total annual government tax revenues in the EU. Countries and their tax authorities cannot plan spending on public services if the expected VAT is not equal to the VAT received.

VAT gap in Poland: PLN 7.4 billion

Poland's VAT gap is €1.69 billion, or about PLN 7.4 billion* - that's how much would have gone to the state budget in 2021 (these are the latest figures, published in October 2023), if not for the difference between expected and actual VAT revenues. 

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*(The euro exchange rate at the end of November 2023 of PLN 4.35 was assumed).

How does Poland compare to Europe?

Although when we are talking about nearly 7.5 billion zlotys, it would seem that as a country we are losing a lot of money on the VAT hole. This is true, but at the same time it must be admitted that compared to Europe we are performing really... well!

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The European Commission publishes a comparative study of the EU VAT Gap Report every year. According to this latest one, published in 2023 (data from 2021), we stand out along with Italy in terms of improvement. "A number of Member States, such as Italy (-10.7 pct.) and Poland (-7.8 pct.), have seen particularly significant declines in national VAT gap values." - We learn from the European Commission's announcement.

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Twenty-seven member states lost some €61 billion in missing VAT, a significant drop from the 2020 figure of €99 billion. The report shows a significant reduction in this figure each year:

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• 2017: €146 billion for 28 member states (11.9%)
• 2018: 143 billion euros for 28 member states (11.2%)
• 2019: 140 billion euros for 28 member states (10.7%)
• 2020: €99 billion for 27 member states (9.6%)
• 2021: €61 billion for 27 member states (5.3%)

Between 2019 and 2021, France, Germany, Italy, the Netherlands, Poland and Spain together accounted for more than 80% of the decline in the total EU VAT gap. Germany and Italy alone accounted for more than 50% of that total.

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That doesn't change the fact that Italy still leads the VAT gap by amount - it's close to €15 billion. France, Romania and Germany rank high, at around €10 billion. 

What are member states doing to reduce the VAT gap?

In addition to tax incentives (reduced rates), many countries - including Poland - have introduced or are in the process of introducing mandatory electronic invoicing or electronic reporting. The main purpose of this measure is to eliminate the VAT gap. This takes different forms in different countries. We wrote more about this in our report "The digital invoicing wave in Europe".

Electronic invoicing

‍An electronic invoice (e-invoice) created in a structured electronic format reduces the number of errors and inconsistencies that paper invoices may have.

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Accurate invoicing is key to ensuring accurate VAT calculations. Implementing e-reporting enables tax authorities to more accurately assess VAT information, monitor economic performance and trends, and identify discrepancies, errors and fraud at an early stage. Although the e-reporting requirement is often linked to the need for e-invoicing, it can also function independently.

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Romania, despite similarities with other member states in its macroeconomic situation, has had no noticeable impact on the development of the VAT compliance gap. Until 2022, Romanian VAT payers were not required to report transaction data, unlike Latvia, Hungary, Poland and Slovakia. This lack has negatively affected the effectiveness of tax enforcement. Romania is therefore introducing a large-scale e-reporting and e-invoicing obligation, which will begin on January 1, 2024.

Government platforms

Many tax authorities have introduced a government platform as part of their e-invoicing regulations. The platform and the regulatory model work differently in each country, but essentially their main goal remains the same - to prevent the circulation of fraudulent invoices.

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Some countries, such as Turkey and Italy, require the invoice to be cleared by the government platform before reaching the recipient. In the near future, France will require the e-invoice service provider to transmit invoice information directly to the tax authority's platform on behalf of the customer.

‍KSeF in Poland

The National e-Invoice System, a mandatory database of invoices, will come into effect in Poland as early as July 1, 2024. They will be uploaded to a single, national system, which will assign them a corresponding number and QR code. An e-Invoice will be considered issued on the day the issuer uploads it to the system.

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Although there are a few exceptions, as a general rule, KSeF must be used by all companies, including foreign companies with a presence in Poland. 

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Many countries around the world have already implemented mandatory electronic invoicing processes: Mexico, Australia, Japan or Portugal. Arab countries also have their solutions. 

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Italy and Serbia already have B2B regulations in place. In 2024 - along with Poland - Romania and Spain will begin implementing mandatory e-Invoices. Latvia, Germany, France and Belgium have announced similar intentions. In these countries, it makes sense to start preparing for the obligation now. 

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Regardless of the model adopted in a country, all models aim to reduce VAT fraud and illegal VAT claims - thus helping to close the VAT gap.

History of the "EU VAT Gap Report".

Each Report analyzes the VAT gap based on data from the two years prior to its publication, as the data necessary for a comprehensive report for the previous year is not available at the time the report is published.

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Accordingly, the first report, published in 2009, examined the VAT gap in the 25 EU member states for 2007. The next report was released in 2014, after which further reports appeared every year

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The report summarizes each member state's VAT gap both in monetary terms and as a percentage of lost VAT revenue relative to the total VAT reported by the member state. These two sets of numbers are key; the monetary value reveals the actual amount of VAT lost, which is crucial to the overall EU figures. The percentage value, on the other hand, illustrates each country's proportionate indication of how much VAT they expect to receive.

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All past reports are available at https://taxation-customs.ec.europa.eu/taxation-1/value-added-tax-vat/vat-gap_en 

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All about KSeF for the micro-entrepreneur

Want to know more about the Polish e-invoicing model? Our experts have created a vademecum for entrepreneurs preparing for the introduction of the new system, in which you will find answers to the most frequently asked questions about KSeF.      

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Download the entrepreneur's vademecum