The UK suffers the largest shortfall in VAT revenues of any country in the EU, it has been revealed.
According to figures from the European Commission, the British government only collects £5 in every £6 of VAT owing to it.
VAT underpayment in the UK amounted to £18 billion in 2006, the EC has estimated.
Part of the reason for the huge deficit is the Treasury’s policy of including the losses on smuggled alcohol and cigarettes when estimating the overall value of VAT underpayments.
Fraud, however, is not the sole explanation for the shortfall. Company insolvencies and legal tax loopholes also make a contribution, the research found.
The problem, though exaggerated in the case of the UK, is not limited to this country.
VAT underpayment across the whole of the EU came to £96 billion in 2006, the equivalent to one in every eight euros that could have been collected.
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.”
