Mind the (VAT) gap, expert warns

Poland’s VAT collection deficit fell annually in 2018 by 4.3 percentage points and a further 0.2 percentage points to a record low of 9.7 percent in 2019, according to early estimates, but the Center for Social and Economic Research (CASE) institute warns COVID-19 may make 2020 collection harder.

When research in 2015 on the VAT deficit showed that tightening up collection and closing loopholes would lead to increases in revenues and this could fund increased social spending, almost no-one believed the figures.

The EC reported that Poland’s VAT Gap in 2014 was 31 percent, meaning that PLN 40 bn (EUR 9 bn) due for VAT was not paid that year. In 2019 this figure fell to EUR 4.45 bn, according to the latest report on the VAT Gap in the EU-28.

Between times major IT solutions overhauled how tax and social security are paid in Poland. This, and greater control over the accounting for the import of goods like fuel and electronics have led to major increases in revenues.

To dissuade companies from evading or simply not paying VAT, all Polish businesses now must prepare a monthly single audit file for the tax office and transactions of more than PLN 15,000 have to be made through a bank account with a VAT account.

The biggest problems in collecting the tax still occur in Romania, which despite major improvements, still lost 33.8 percent of its possible VAT revenue in 2018 and 33.4 percent in 2019.

Poland is a significant distance behind the best performers Sweden (0.7 percent) and Croatia (3.5 percent) but is doing better than the average of just over 11 percent.

Nevertheless, Grzegorz Poniatowski, the leader of the team at the CASE institute which produces the data for the EC has warned that VAT collection during the crisis brought about by the COVID-19 pandemic was likely to get worse rather than better.

He said on Thursday that it was likely the VAT gap would rise to around 14.5 percent, giving a deficit of around PLN 30 bn (EUR 6.7 bn), and so above the current EU average.

“The fall in business activity and cash flow problems are making it difficult for a lot of business people to cover their tax bills, which may encourage them to try to get round tax regulations,” Mr Poniatowski wrote.