In search of the lost VAT

Not all European governments are suffering from lower-than-expected value-added tax (VAT) revenues, but all have been affected by this in recent times. The forecast for value-added tax revenue in 2024 was overestimated by 4 per cent in Germany and by 2.5 per cent in the United Kingdom. In France, the figures set out in the end-of-financial-year bill for 2024, passed by Parliament a few hours before the Barnier government was brought down, suggest that the government’s forecast in the draft Finance Bill (PLF) 2024 in autumn 2023 overestimated revenue by 5.5 per cent, representing a shortfall of 11 billion euros. And since the accounts for 2024 have not yet been finalised, the VAT shortfall could well widen (or narrow) in the near future. To explain this ‘shortfall’ in VAT revenue – which is almost as large as that for corporation tax – we need to look at the mechanics of a tax that, whilst familiar, is often misunderstood.