Britain 'losing billions in VAT'

by Douglas Fraser
Business and economy editor, BBC Scotland

VAT owed to the UK government is underpaid by billions of pounds

The British Government has been losing out on as much as £1 in every £6 that it could be collecting in VAT revenue, according to research.

The European Commission has been looking at avoidance of VAT across the EU to help it crack down on fraud.

Analysis commissioned from a London consultancy found Britain had the biggest shortfall of any country.

The government estimates underpayment for 2006 at nearly £13bn, while the EU research puts it at more than £18bn.

Loopholes

The gap is partly explained by the Treasury's calculation of its loss of Britain's VAT on smuggled alcohol and tobacco being counted towards excise underpayment.

Not all of the gap is explained by fraud, and the Reckon consultancy, which conducted the analysis, says it is possible not all fraud is included.

Other explanations for underpayment include company insolvency and legal avoidance loopholes, and the researchers concede they had access to less data than government statisticians.

'Tax fraud'

Comparing potential revenue and actual outturns, VAT underpayment across Europe in 2006 ran to nearly 107bn euros ($158bn; £96bn). That is 12% of potential, or 1 euro in every 8 euros that could be collected.

The "VAT gap" calculated for 2005 was even higher, at 113bn euros.

The 2006 figures show the gap to be highest in percentage terms in Greece, at 30% of potential revenue, with Slovakia, Hungary, Italy and Lithuania rating above 20% losses.

Those with the strongest tax revenue performance included Luxembourg, the Netherlands, Sweden and Spain, at less than 5%.

The research was commissioned to help the European Commission understand the extent of tax fraud and evasion, so that it can help make cross-border rules to combat it.

Laszlo Kovacs, the EU commissioner for taxation and customs, said: "In our fight against tax fraud we need figures on the size of the revenue losses. This study on the VAT gap confirms estimates of VAT fraud that were made in the past and stresses the absolute need for the EU and member states to continue their efforts in fighting VAT fraud".