The Evolving Landscape of VAT in the EU

As the European Union (EU) continues to modernise its tax systems, the 2025 Annual Report on Taxation from the European Commission offers a timely and comprehensive overview of the state of value-added tax (VAT) across the EU. For VAT professionals, this report is a strategic compass pointing to where compliance, digital transformation, and policy reform are headed, rather than just a statistical update.

VAT’s Role in the EU Economy

In 2023, VAT revenue accounted for 7.1% of GDP and 18.3% of total tax revenue across the EU-27. These figures underscore VAT’s central role in funding public services and maintaining fiscal stability. Nevertheless, the system faces ongoing challenges, and chief among them is the persistent VAT gap, which highlights the pressing need to reform VAT legislation that impacts compliance processes.

The VAT Gap: A Persistent Challenge

The VAT gap, or the difference between expected and actual VAT revenue, stood at €89 billion in 2022, or 7% of the total expected VAT collections. This actually marked a slight increase from the previous year, reversing some of the VAT gap improvements made during the pandemic. 

The disparity among member states is striking : Portugal (1.3%), Hungary (2.3%), and Austria (3.0%) lead in lowest VAT gaps, while Romania (30.6%), Malta (25.9%), and Slovakia (14.6%) face significant shortfalls in VAT collected.

VIDA: A Digital Overhaul Three Decades in the Making

The most transformative development in the VAT space is the adoption of the “VAT in the Digital Age” (VIDA) initiative in March 2025. This sweeping reform, the first of its kind in over three decades, is built on three pillars:

• Digital Reporting Requirements (DRR): A unified system of real-time, transaction-based digital reporting and e-invoicing for intra-community transactions. This is expected to reduce VAT fraud by up to €11.1 billion annually over the next decade.
• Single VAT Registration (SVR): An expansion of the One-Stop Shop (OSS) that allows businesses to manage VAT obligations across the EU through a single registration. SMEs stand to save an estimated €8.7 billion in administrative costs over ten years.
• Platform Economy Rules: New obligations for platforms in the short-term accommodation and passenger transport sectors to collect and remit VAT. This levels the playing field with traditional providers and could generate up to €6.6 billion in additional annual revenue.

Closing the VAT Gap: What’s Working?

The report highlights that closing the VAT gap requires a multi-pronged approach. Countries like Hungary, Latvia, and Poland have seen success through targeted policy instruments such as digital reporting obligations (e.g., SAF-T) and online cash registers. These tools enhance transparency and reduce opportunities for VAT evasion.

What This Means for VAT Professionals

For those navigating the complexities of VAT compliance, the 2025 report is both a wake-up call and a roadmap. The shift toward digitalisation is no longer optional. It is imperative. Businesses must prepare for real-time reporting, adapt to new platform economy rules, and embrace automation to stay compliant and competitive.

As the EU moves toward a more harmonised and digitally integrated VAT system, professionals in tax, finance, and compliance must stay informed and agile. The 2025 Annual Report on Taxation is an essential resource for understanding where we are, and where we’re headed. 

For further insights into the evolving landscape in Europe especially with regards to e-invoicing mandates and the compliance challenges to watch out for, you might find my earlier blog post helpful.