2. Tax gaps: VAT
Updated 20 June 2024
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Summary
The VAT gap methodology uses a ‘top-down’ approach which is an established, objective way of measuring the tax gap in line with international best practice. However, it provides limited information on causes of changes to the VAT gap from year to year.
To evaluate the uncertainty of the tax gap, we assign an uncertainty rating for each tax gap component, ranging from ‘very low’ to ‘very high’. The VAT tax gap estimate has ‘low’ uncertainty.
Overview
Figure 2.1 shows the VAT gap time-series in absolute terms and as a percentage of theoretical VAT liability.
The tax gap for VAT is estimated to be 4.9% of theoretical VAT liability, or £8.1 billion in absolute terms, in the 2022 to 2023 tax year.
The VAT gap shows a downward trend, falling from 13.7% to 4.9% between tax years 2005 to 2006 and 2022 to 2023.
Figure 2.1: VAT gap by value and as a percentage of theoretical tax liability, 2005 to 2006 up to 2022 to 2023
Notes for Figure 2.1
- The full data series can be seen in the online tables.
Main findings
Overview
The VAT gap is estimated to be 4.9% of theoretical VAT liability, or £8.1 billion in absolute terms, in the 2022 to 2023 tax year.
The VAT gap has reduced from 13.7% of theoretical VAT liability in 2005 to 2006 (or £11.6 billion) to 4.9% in 2022 to 2023 (or £8.1 billion).
The 2022 to 2023 VAT gap has been revised downwards from both the preliminary estimate of £8.8 billion (equating to 5.3% of the VAT theoretical liability) published alongside ‘Autumn Statement 2023’ in November 2023 and the second estimate of £8.6 billion (equating to 5.2% of VAT theoretical liability), published alongside ‘Spring Budget 2023’ in March 2024.
The VAT gap has decreased from 5.9% in 2021 to 2022 to 4.9% in 2022 to 2023, as the theoretical VAT liability is estimated to have increased at a slower rate than VAT receipts increased.
Table 2.1: Estimated VAT gap (£ billion)
Table 2.1 shows how the VAT gap estimate compares to theoretical VAT liability, VAT receipts and the contribution of non-payment to the VAT gap.
| Estimated VAT gap | 2005-06 | 2016-17 | 2017-18 | 2018-19 | 2019-20 | 2020-21 | 2021-22 | 2022-23 |
|---|---|---|---|---|---|---|---|---|
| Theoretical VAT liability | 84.5 | 131.0 | 137.2 | 141.5 | 146.4 | 127.2 | 143.2 | 166.1 |
| VAT receipts | 72.9 | 119.8 | 126.5 | 132.5 | 129.8 | 101.6 | 157.5 | 159.7 |
| VAT receipts (with adjustment for VAT payments deferral) | - | - | - | - | 134.8 | 120.6 | 134.2 | 158.1 |
| VAT gap | 11.6 | 11.2 | 10.8 | 9.1 | 11.6 | 6.6 | 8.4 | 8.1 |
| VAT gap of which non-payment | - | 1.5 | 1.6 | 1.6 | 2.2 | 2.4 | 2.3 | 3.6 |
Notes for Table 2.1
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The full data series can be seen in the online tables.
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The amounts are rounded to the nearest £0.1 billion.
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Figures for previous years have been revised following methodological improvements and incorporating more up-to-date data, notably from the Office for National Statistics on consumer expenditure.
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For VAT, non-payment is the difference between new debts arising in the tax year, less debt paid in the tax year.
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Due to data issues, the debt contribution can only be measured from tax year 2007 to 2008 onwards, therefore a - is in place where data is unavailable.
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The year 2005 to 2006 has been included to illustrate the long-term trend.
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From 2019 to 2020 through to 2022 to 2023, the VAT receipts figures used to estimate the VAT gap have been adjusted to account for the impact of the VAT deferred between March 2020 and June 2020 under the ‘VAT Payments Deferral Scheme’ and the ‘VAT Deferral New Payment Scheme’ – key fiscal support measures in the government’s response to COVID-19. When estimating the VAT gap for these years, this adjustment ensures that only the net VAT receipts which related to the theoretical VAT liability in the year are properly taken into account.
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The VAT total theoretical liability is the amount of VAT that should be collected in theory. This means applying the rate of VAT on that expenditure where VAT should be payable, assuming that there is no fraud, avoidance, or losses due to error or non-compliance.
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The VAT total theoretical liability includes irrecoverable VAT, which is the VAT paid on ‘finally taxed expenditure’ which cannot be reclaimed, for example by those not registered for VAT.
The VAT gap is derived from 2 very large numbers, the theoretical VAT liability and VAT receipts, and any change to either of these numbers has a big impact on the VAT gap estimates. The trend in the time series is considered a better indicator of changes in the VAT gap, rather than its year-on-year fluctuations.
Additional findings
Overview
The VAT gap peaked at 13.7% in tax year 2008 to 2009. This was partly because the recession caused an increase in VAT non-payment (which is included in the VAT gap) from £0.8 billion in 2007 to 2008 to £2.4 billion in 2008 to 2009.
The VAT gap shows a long-term downward trend from the 2005 to 2006 tax year to the 2022 to 2023 tax year. During the coronavirus (COVID-19) period of 2020 to 2021 and 2021 to 2022 the VAT gap was markedly lower than previous years, falling from 7.9% in 2019 to 2020 to 5.2% in 2020 to 2021. The VAT gap fell to 4.9% in 2022 to 2023.
During 2022 to 2023, more than two-thirds of the theoretical VAT liability was estimated to be from household consumption, as is the case most years. The remainder came from the expenditure by businesses that supply goods and services where the VAT is non-recoverable (they are exempt from VAT), and from the government and housing sectors.
Figure 2.2 shows that over half of the theoretical VAT liability from household consumption was in the following categories: ‘restaurants and hotels’, ‘transport’, and ‘recreation and culture’.
Figure 2.2: Composition of expenditure liable to VAT at the standard or reduced rate for the household sector in 2022 to 2023 (percentage of expenditure by sector)
| Category | Percentage |
|---|---|
| Restaurants and hotels | 21.2 |
| Transport | 17.5 |
| Recreation and culture | 15.8 |
| Household goods and services | 9.7 |
| Miscellaneous | 9.1 |
| Clothing and footwear | 8.0 |
| Alcohol and tobacco | 5.6 |
| Housing | 5.1 |
| Communication | 3.3 |
| Food and drink | 3.2 |
| Health | 1.4 |
| Education | 0.0 |
Notes for Figure 2.2
- Numbers may not sum to 100% due to rounding.
Revisions
Overview
Figure 2.3 shows the revisions to the VAT gap since the publication of ‘Measuring tax gaps 2023 edition’. These resulted in an overall change in the VAT gap time-series. For the years prior to the COVID-19 pandemic (from 2005 to 2006 up to 2019 to 2020), the change is, on average, a decrease of around 0.2 percentage points or £0.3 billion per annum. For the year 2021 to 2022, the change is larger, with a 0.6 percentage point (or £0.8 billion) increase to the VAT gap estimate. The main data updates to the VAT gap model are that:
- the model has been updated with the latest expenditure data from the Office for National Statistics
The model has been updated with new data from 2 Office for National Statistics data sources:
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the ‘Consumer trends’ publications (up to and including quarter 4 2023), which are used to capture the expenditure of the household sector
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the ‘Blue Book 2023’ publication, which is used to capture the expenditure of other sectors (housing, exempt businesses and government). The changes since the last Blue Book publication are outlined in a series of articles published by the Office for National Statistics
The revisions to the VAT gap estimate since the last publication have been primarily due to the impacts of updating the VAT gap model with the latest expenditure data published by the Office for National Statistics in ‘Blue Book 2023’ and ‘Consumer trends’ quarter 1 to 4.
- net VAT receipts figures have been updated to align with the latest published HMRC tax receipts. The net VAT receipts figures in the model were revised to be fully aligned to the latest available HMRC Trust Statement figures
As the ‘Blue Book 2024’ publication is not set to be released until after ‘Measuring tax gaps 2024 edition’ in autumn 2024, 2022 to 2023 expenditure data is not available for the housing sector, the government sector and businesses making exempt supplies sector (around 30% of the net VTTL). The expenditure figures for these sectors in the 2022 to 2023 VAT gap estimate are therefore based on a forecast using the latest economic determinants provided by the Office for Budget Responsibility.
Figure 2.3: Revisions to VAT gap since the ‘Measuring tax gaps 2023 edition’
Notes for Figure 2.3
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The full data series can be seen in the online tables.
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MTG stands for ‘Measuring tax gaps’.
Due to the need for adjustments to allow for the impact of the VAT Deferral Scheme(s) and other impacts, the VAT gap estimate in most recent years is subject to more uncertainty than usual and should, therefore, be treated with extra caution.
HMRC only publishes a revised historical VAT gap series once a year in the ‘Measuring tax gaps’ publication.
The VAT gap preliminary estimate for 2023 to 2024 is expected to be published in autumn 2024 alongside an update from the Office for Budget Responsibility in their economic and fiscal forecast, and a second estimate is expected to be published alongside ‘Spring Statement 2025’.
The preliminary and second estimate of the VAT gap will only include revisions for new data and required methodology improvements, to ensure the correct treatment of the new data. The exact release dates will be available on GOV.UK.