Vat should be applied to a much bigger range of goods and at the standard rate, according to an EU report that will pressure the Government to abolish the reductions and exemptions on food and children’s footwear.
The amount of Vat that the State could have collected and didn’t sky-rocketed following the onset of the economic crisis, losing the exchequer close to €2bn a year in 2009, according to the study.
But the State could collect up to 40% extra by imposing Vat on a greater number of products and services and at 21% rate, the report says.
Despite Ireland having one of the best records for collecting Vat due, the European Commission is highly critical of Vat policy, especially with so many exemptions and ‘zero rates’ for household goods.
As a result the State collects just 60% of what it could if the standard rate was applied more widely and the total of what could be collected was.
The study notes that the household sector is expected to contribute just less than half the total Vat receipts — the second lowest share of any EU country. This, says the Commission, is "an indication of the possible large distortions introduced by the exemptions and multiple rate system".
"Member states should broaden their tax bases and minimise exemptions and reductions in order to improve the efficiency of their tax systems. This would not only result in substantial new revenue, but it would also create simpler tax systems for businesses to work within, thereby facilitating greater compliance", the report said.
It was also critical of the frequent changes to the Vat rates the government made, increasing and decreasing the rates nine times in ten years.
An estimated €193bn — 1.5% of GDP — was lost to EU countries in 2011 because of fraud, failure to collect and poor policy choices by governments, Taxation commissioner Algirdas Semeta said.
"The amount of Vat that is slipping through the net is unacceptable; particularly given the impact such sums could have in bolstering public finances." he said in a statement.
Simplifying tax systems, taxing more services and products, limiting those that are exempted or given specially reduced rates will all help the state collect more of the Vat it is due, he said.
In the past decade the best year for Vat compliance was 2001, at the height of the Celtic Tiger when the amount estimated to be lost was just €112m, or 1% of the total collected and the full rate was 20%.
This jumped to 15% in 2019, €1.8bn, when Vat was increased to 21.5% and the crisis affected revenues, especially from gross fixed capital formation — investment such as construction.
Other crisis-hit countries — Spain, Greece, Latvia, Portugal and Slovakia — also saw the highest increase in their gaps.
Romania collected just about half the total Vat liable in 2009, making it the worst performer in the EU, while the best was the Netherlands in 2005 when the amount they failed to collect was put at 0.2%.