Official Statistics

Scottish VAT assignment 2022 - supplementary information

Updated 14 November 2024

The latest release was published 09:30 14 November 2024. 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 (p) of the standard rate of VAT (currently 20%) be assigned to the Scottish government’s budget. The UK and Scottish governments agreed to this methodology in the 2016 Final Framework, also including receipts raised in Scotland by the first 2.5p of the reduced rate of VAT (currently 5%).

In October 2020 the United Kingdom (UK) and Scottish governments agreed that how and when VAT assignment will be implemented should be established as part of the wider review of the Scottish government’s Fiscal Framework. A revised fiscal framework was published in August 2023, which reitereated the rates above but did not set a date for implementation.

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 VA 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 VA model is based on HM Revenue and Custom’s (HMRC) VAT Total Theoretical Liability model, an internationally recognised methodology for estimating national VAT liabilities. The VA 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 of standard-rated VAT raised in Scotland, and the first 2.5 percentage points 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 VA model

The VA model is made up of 5 main spending components with the largest contribution coming from household spending (approximately 86%):

• 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 VA model, accounting for approximately 86% 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 VA model.

The Living Costs and Food Survey 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. In the 2020 to 2021 financial year the sample size was 752 compared to 360 in the 2016 to 2017 financial year. 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 four other spending components and two adjustment components.

2.4 Spending components

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, and therefore their purchases are standard rated.

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 both the 2020 to 2021, and 2021 to 2022 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 liabilities

In previous publications, figures have been published by either calendar year or financial year. For the 2022 publication, we have published VAT receipts data in ‘VAT liability’ years, which records VAT based on when VAT receipts are recorded by businesses and become liable, rather than when VAT payments are made by businesses which can be up to three months later.

Methodological revisions

These revisions are permanent changes to the methodology which have affected the back series of the VA share. For revisions specific to the 2022 publication, see revisions specific to 2022.

• partially exempt: In the 2021 publication a formula error was identified in the partially exempt sector of the model, meaning the full expenditure was applied to our calculations, not the amount of expenditure subject to VAT. This affected the full back series, with the most significant difference being in the 2020 year where the Scottish VA share reduced by 0.2 percentage points. For the 2022 publication there has been further corrections to rectify this historical error.

• 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 VA share (£ million) have changed for 2020 from what was previously published

These methodology changes have impacted the back series of the VA share and Standard Rate Equivalent expenditure. In particular, the partially exempt error has meant that the back series for the proportions of standard rate equivalent expenditure has altered. In previous releases, the household sector was reported to consistently make up around 70% of expenditure from 2011 to 2020. With this correction, the household sector now consistently makes up between 85% and 87% of expenditure for the 2022 and the back series (2011 to 2021). This is because the partially exempt error correction (reducing by 80%) has reduced both the exempt and central government expenditure categories, and so while household expenditure has not increased, the proportion of total SRE expenditure that households make up has increased.

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 VA 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 figure 5 in the Scottish VAT assignment 2022 publication 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

In August 2023 the UK and Scottish government published their review of the Fiscal Framework Agreement, which agreed the continuation of the development and testing of the methodology for calculating Scotland’s aggregated share of VAT liabilities. During the extended transition period, the publication timeline will be considered fully by stakeholders and therefore future publication plans are yet to be confirmed.

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

Bulletin is Crown copyright. Information may be used provided that the source is acknowledged.