Pearse Doherty (Donegal, Sinn Fein)
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267. To ask the Minister for Finance the composition of a matter the EU calls the VAT gap, the reduced or zero rates applicable and the cost attached to each instance by product or service; and if he will make a statement on the matter. [27437/17]

Paschal Donohoe (Dublin Central, Fine Gael)
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The VAT gap is an estimate comparing a maximum theoretical tax liability (approximated from economic activity in a country) against actual VAT collected. The difference arises due to a range of factors. These include revenue loss due to fraud and evasion. However, it also covers insolvencies, bankruptcies, administrative errors, legal tax optimisation as well as miscalculations.

Since 2009 the European Commission has hired consultants to estimate the VAT gap in each EU Member State. Given its nature, a tax gap cannot be easily or reliably measured. It must be estimated on the basis of limited data and making a number of assumptions. While Ireland has engaged with Commission on this topic, I am advised that Revenue has concerns around the robustness of the methodology used and the accuracy of the results. Notwithstanding these concerns, it is useful to note the overall trends. Ireland’s VAT gap is estimated at 9% for 2014 in the most recent study (published in 2016) and down from 13% for 2013. From an EU perspective the average VAT gap is estimated at 14.1% with Ireland ranking as the 8th lowest across Member States.

As well as the main VAT gap, the Commission also estimates the policy gap (an indicator of the additional VAT revenue that a Member State could theoretically, i.e. with perfect tax compliance, generate if a uniform VAT rate applied on all goods and services). Components of the policy gap include the loss in VAT liability due to the application of reduced rates and the loss in liability due to the implementation of exemptions. The Commission’s consultants estimate that Ireland has a 52.8% measure for the policy gap (VAT revenues would increase by 52.8% with the application of a uniform VAT rate to items that are exempt or zero rated, e.g. the provision of medical services, education, food, children's’ clothing and footwear, etc.). The EU average is 43.3%.

The VAT policy gap does not provide a detailed breakdown of the costs within each VAT rate or for VAT exempt activities. Essentially the policy gap measures the total revenue that would be collected if the standard VAT rate was applied to the supplies of all goods and services. For example, I am informed by Revenue that if the standard rate of VAT was applied to the supply of all zero-rated food items, the potential VAT revenue yields would be in the region of €1.5 billion.