Official Statistics

Scottish VAT Assignment 2023 - supplementary information

Updated 18 December 2025

The latest release was published 09:30 18 December 2025. The next release will be published at a date to be confirmed.

1. Policy background

Currently, Value Added Tax (VAT) revenue calculated in this model is not assigned to Scotland and these statistics have no impact on the Scottish government’s budget.

The Smith Commission recommended that the receipts raised in Scotland by the first 10 percentage point (10p) of the standard rate of VAT (currently 20%) be assigned to the Scottish government’s budget. This includes receipts raised in Scotland by the first 2.5p of the reduced rate of VAT (currently 5%). The UK and Scottish governments agreed to this methodology in the 2016 Final Framework.

A date of implementation for Scottish VAT Assignment is yet to be agreed between the UK and Scottish Governments.

As recommended by the Smith Commission, this draft methodology has been agreed between the UK and Scottish governments to estimate the VAT Assignment (VA) share Scotland would receive. The methodology is still subject to revision.

2. Methodology

The Scottish VAT Assignment: summary of VAT assignment model paper (November 2018) outlines the Scottish and UK governments’ implementation of Scottish VAT Assignment, and details the methodology for calculating Scottish VAT receipts using the Scottish VA model.

The VAT Assignment model enables the UK and Scottish governments to estimate Scottish VAT without creating additional reporting and administrative burdens for businesses.

It is not possible to measure outturn VAT receipts arising from consumption in Scotland as the information collected through VAT returns from businesses does not specify the UK region in which goods and services are consumed.

The VAT Assignment model is based on HM Revenue and Custom’s (HMRC) VAT Total Theoretical Liability model (VTTL), an internationally recognised methodology for estimating national VAT liabilities. The VAT Assignment model has been jointly developed between HM Treasury, HMRC and Scottish Government officials and makes use of independent expenditure data. The model calculates an outturn figure which is the first 10 percentage points (10p) of standard-rated VAT raised in Scotland, and the first 2.5 percentage points (2.5p) of reduced-rated VAT.

The share has then been applied to VAT receipts relating to the financial year to reflect the assumed 3-month time lag between VAT liabilities arising and VAT receipts being paid to HMRC.

HMRC total VAT receipts are used to produce the illustrative VA £ million figures as they are presented on a cash basis. This means that £ million figures are based on cash collected which is the agreed methodology for Scottish VAT Assignment.

2.1 Data sources used within the Scottish VAT Assignment model

The VAT Assignment model is made up of 5 main spending components with the largest contribution coming from household spending (approximately 70%):

• household
• charities
• central government
• exempt
• housing (expenditure on construction and repairs that are not included in household)

The model also has two adjustment components:

• corrections
• unregistered traders

There are also technical adjustments to ensure VAT rules are applied correctly (see adjustments below).

By multiplying comprehensive components of expenditure in Scotland by their appropriate VAT rates, allowing for any other relevant rules determining liability for tax, we can estimate the Scottish share of total UK VAT.

2.2 The household component and the Living Cost and Food Survey

The household component is the largest expenditure component of the VAT Assignment model, accounting for approximately 70% of activity.

The Living Costs and Food (LCF) Survey is the primary data source used to split household expenditure by country/region to calculate the Scottish share of UK household expenditure in the VAT Assignment model.

The LCF is an annual survey designed primarily to measure household expenditure on goods and services. Respondents, including children, keep a detailed diary of expenditure for 2 weeks, recording weights and volumes of food and drink items bought. The Scottish proportions of expenditure estimated from the LCF Survey are then applied to UK level estimates of household final consumption expenditure (HHFCE) published by the ONS.

The ONS publishes standard errors for LCF expenditure in the LCF technical report data tables. More information on LCF standard error methodology is available from the ONS website.

In some expenditure categories where the sample size is small, UK and Scottish government officials have jointly agreed to reduce the sampling error by using an average of 3 or more years of survey data to calculate the regional share, thereby boosting the sample size.

HMRC and the Scottish Government have also continued to jointly sponsor a boost to the Scottish sample size of the LCF Survey from the 2017 to 2018 financial year to increase the accuracy of the regional splits for household expenditure. Detail can found in the LCF technical report. This boosted sample also included additional regions in Scotland such as the Highlands and north of the Caledonian Canal.

2.3 Other data sources

As well as the household component, the model is made up of five other spending components and two adjustment components.

2.4 Spending components

Household

The expenditure in the household component typically includes household goods and services, adult clothing, power, and others.

Charities

Charities are subject to complex VAT rules. Therefore this sector calculates VAT on consumption and goods by charities in Scotland.

Central government

This sector works by calculating the proportion of government staff costs within Scotland compared to the rest of the UK. This includes staff costs in public administration, education, health, residential care and social work.

Exempt

This sector applies to businesses that manufacture exempt products. These businesses cannot recover VAT on purchases relating to exempt supplies, even when those purchases may include VAT at the standard rate.

The UK exempt sector is mainly made up of the following significant partially exempt industries:

• postal and courier services
• financial services
• education
• human health activities
• residential and social care
• activities of membership organisations
• other personal services

Housing

Housing consists of elements in housing construction and repairs that are not included in household expenditure, such as the purchase or significant maintenance to dwellings which are standard rated. It should be noted that this does not include new build properties which are zero rated.

Adjustments

Adjustments are made up of corrections and unregistered traders. The model includes adjustments to accurately reflect different rules and exemptions in the VAT system.

Adjustments are applied on a regional (for England) or country (for Scotland, Wales, and Northern Ireland) basis to the total standard rate equivalent (SRE) expenditure to account for expenditure by unregistered traders, domestic tourism, place of supply and government departments contracted out services. For more information on SRE expenditure, see section 3.

For example, adjustments are required for unregistered traders. Traders with annual VAT taxable turnover (turnover of non-exempt goods and services) below the VAT registration threshold (£85,000 in the 2020 to 2021, 2021 to 2022, and 2022 to 2023 financial years) are not liable to register for VAT and are not able to reclaim VAT on inputs.

The expenditure data is largely based on surveys which does not specify if expenditure is on goods and services from a business above or below the VAT threshold. For simplicity, the model starts by assuming the expenditure data relates to purchases from businesses above the VAT threshold.

To adjust for expenditure by unregistered traders, a negative adjustment must be made to household expenditure, as no VAT will be paid by households on sales from these unregistered traders, and a positive adjustment must be made to the intermediate current expenditure to capture the amount of ‘stuck’ VAT that is paid on the inputs of these traders, which they are unable to reclaim.

2.5 Revisions

VAT receipts

In previous publications, we indicated that VAT liabilities were used. However, subsequent quality assurance has determined that VAT receipts should have been applied. The difference between the two are small and do not result in any material impact.

Methodological revisions

These revisions are permanent changes to the methodology which have affected the back series of the VAT Assignment share.

• partially exempt: Following further quality assurance, we have re-assessed what sectors are partially exempt and the formula used to calculate non-reclaimable UK VAT due to partial exemption. As a result of this review, we have made the necessary adjustments to the model. The household sector now makes up around 70% of expenditure from 2012 to 2023. This brings the outputs of the VAT Assignment model in line with the VTTL.

• VAT receipts adjustment: In 2020, during the COVID-19 pandemic, a VAT deferral scheme was introduced which allowed VAT-registered traders to defer payments arising between 20 March 2020 and 30 June 2020 until 31 March 2021. A further scheme allowed customers to delay VAT payments arising from 20 March 2020 to 30 June 2020 until March 2022. To account for the longer lag between receipts and liabilities, a manual adjustment to UK VAT receipts has been made to 2020 and 2021, which the model feeds through into the Scottish VA share (£ million) estimates. This adjustment raises receipts in 2020 (these receipts would have been liable in 2020 but paid in 2021) and lowered 2021 receipts (to account for 2020 liabilities paid in 2021). As the 2020 publication did not account for this lag in VAT payments, the total UK VAT receipts in this year’s publication (labelled as VAT liabilities), and the illustrative Scottish VAT Assignment share (£ million) have changed for 2020 from what was previously published.

These methodology changes have impacted the back series of the VAT Assignment share and Standard Rate Equivalent expenditure. The household sector is 18 percentage points lower and now constitutes 65% of VAT-liable expenditure for 2023. Retrospectively, the backseries for the household sector is now around 67% to 72% (2012 to 2022) instead of 83% to 87% as previously published. The central government sector is 14 percentage points higher than expected and now accounts for 21.54% of VAT-liable expenditure in 2023. The backseries has also been revised to between 12% and 20% (2012–2022), compared with the previously published range of 4% to 7%.

2.6 What are Official Statistics in Development?

These statistics are currently Official Statistics in Development. Official Statistics in Development have been published to involve potential users at an early stage in building high quality statistics that meet users’ needs. The label of Official Statistics in Development does not mean that the statistics are of low quality, but it does signify that the statistics are novel and still being developed.

On completion of the development phase HMRC may consider applying to the Office for Statistics Regulation to have these statistics assessed for designation as National Statistics.

3. Standard rate equivalent expenditure

3.1 What is standard rate equivalent expenditure?

VAT is a consumption tax paid on goods and services. There are 3 main rates of VAT (standard rated (20%), reduced rated (5%) and zero-rated (0%)) and there are also goods and services that are exempt or outside the scope of VAT.

To translate expenditure, subject to different rates of VAT, into a common VAT currency, we make use of a concept called SRE expenditure. Each unit of SRE expenditure represents the same amount of VAT.

This concept is simply a mechanism to reflect the equivalent value of expenditure if the standard rate of VAT is applied. It is used here to make meaningful comparisons across expenditure components to understand the modelling.

3.2 Why do we need standard rate equivalent expenditure?

SRE expenditure is where expenditure liable to VAT is converted to a standard rate equivalent. This means the expenditure of an item is calculated as if it was standard rated, where VAT is 20%.

For example, if net expenditure (excluding VAT) of £10.00 is liable to a reduced rate of VAT (5%), gross expenditure would be £10.50 (net expenditure + VAT of £0.50). The standard rate equivalent would be a gross amount that includes the same level VAT, in this case £0.50 at the standard rate of 20%.

The standard rate equivalent would be net expenditure of £2.50, because with a standard rate applied (20%), the VAT would be £0.50, and gross expenditure would be £3.00.

SRE expenditure presented in this publication is all on a gross expenditure basis (meaning it is inclusive of VAT). Zero rated items (VAT rate of 0%) will have an SRE expenditure of £0.00 regardless of their value.

3.3 What does this look like for the household expenditure components that include standard rated, reduced rated and zero-rated expenditure?

The household expenditure component is made up of sub-components within the LCF at the classification of individual consumption by purpose (COICOP) level, which have some element of expenditure within them liable to VAT.

For example, the health component (a sub-component within household expenditure) contains goods and services liable to standard rate, reduced rate, and zero-rated VAT, as well as goods and services which are exempt from VAT.

Within the Health sub-component all hospital services are exempt from VAT so excluded from the Scottish VAT Assignment model. Expenditure on pharmaceutical products is predominantly standard rated but also includes products sold on prescriptions that are zero-rated and smoking cessation products that are reduced rated.

All expenditure on these separate sub-components is converted to SRE expenditure.

This removes all expenditure from the model that is zero-rated, converts all reduced rated net expenditure to a value 4 times smaller (the equivalent amount of net expenditure which would be liable to the same amount of VAT at the standard rate of VAT, since 20% ÷ 5% = 4), and includes all the standard rated expenditure, in a common currency.

3.4 How does Standard Rate Equivalent expenditure compare to overall expenditure?

When expenditure is converted to SRE expenditure, the assumptions related to standard rated goods and services across all sectors are applied on a UK basis. Therefore, calculating SRE expenditure does not introduce any regional variation in expenditure in Scotland relative to the rest of the UK (rUK).

3.5 What other adjustments have been made to Standard Rate Equivalent expenditure?

The SRE expenditure analysis presented in Table 6 of the accompanying tables shows the expenditure components before deducting adjustments. This is because adjustments are made at the final stage of the modelling and cannot be incorporated at the component expenditure levels.

4. Future plans

Policy discussions between the Scottish and UK Governments are continuing to take place through the Joint Exchequer Committee. Publication plans remain under review.

We welcome user feedback on our proposed timeline for future publications.

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