Official Statistics

2. Tax gaps: VAT

Updated 23 June 2026

Summary

The VAT gap methodology uses a top-down approach which calculates the difference between the total theoretical tax liability and total VAT receipts. This is an established, objective way of measuring the tax gap in line with international best practice. However, it provides limited information on causes of year to year changes in the VAT gap .

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 gap estimate has ‘medium’ 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 6.6% of theoretical VAT liability, or £12.1 billion in absolute terms, in the 2024 to 2025 tax year.

The VAT gap shows a long-term downward trend, falling from 14.1% to 6.6% between tax years 2005 to 2006 and 2024 to 2025, although there have been fluctuations in recent years.

Figure 2.1: VAT gap by value and as a percentage of theoretical tax liability, 2005 to 2006 up to 2024 to 2025

Notes for Figure 2.1:

1. The full data series can be seen in the online tables.

Main findings

Overview

The VAT gap is estimated to be 6.6% of theoretical VAT liability, or £12.1 billion in absolute terms, in the 2024 to 2025 tax year.

The VAT gap has reduced in percentage terms from 14.1% (£11.9 billion) of theoretical VAT liability in 2005 to 2006 to 6.6% (£12.1 billion) in 2024 to 2025. The 2024 to 2025 VAT gap has been revised upwards from both the preliminary estimate of 6.2% (£11.4 billion) published alongside ‘Autumn Statement 2025’ in November 2025, and the second estimate of 6.5% (£11.9 billion), published alongside ‘Spring Budget 2026’ in March 2026.

The VAT gap shows a long-term downward trend from the 2005 to 2006 tax year to the 2024 to 2025 tax year. During the coronavirus (COVID-19) period of 2020 to 2021, the VAT gap was lower than previous years but reverts to the trend in the following years. The VAT gap is the difference between 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 year-on-year fluctuations.

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	2020-21	2021-22	2022-23	2023-24	2024-25
Theoretical VAT liability	128.0	144.8	172.3	177.9	182.8
VAT receipts	101.6	157.5	158.0	168.3	170.9
VAT receipts (with adjustment for VAT payments deferral)	120.6	134.8	156.4	167.6	170.7
VAT gap	7.4	10.0	16.0	10.3	12.1
VAT gap of which non-payment	2.4	2.6	3.3	2.6	2.4

Notes for Table 2.1:

1. The full data series can be seen in the online tables.

2. The amounts are rounded to the nearest £0.1 billion.

3. Figures for previous years have been revised following methodological improvements and incorporating more up-to-date data, notably from the Office for National Statistics (ONS) on consumer expenditure.

4. For VAT, the non-payment tax gap is an estimate of eventual non-payment attributable to the year of VAT debt creation.

5. 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 are related to the theoretical VAT liability in the year are properly taken into account.

6. The theoretical VAT liability is the amount of VAT that should be paid in theory. This is calculated by applying the rate of VAT on expenditure where VAT should be payable, assuming that there are no fraud, avoidance, or losses due to error or non-compliance.

7. The theoretical VAT 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.

Calculating the theoretical VAT liability

Overview

There are 3 rates of VAT that can be charged on taxable goods and services: the standard rate, the reduced rate and the zero rate. Some expenditure is exempt from VAT such as postage stamps, financial and property transactions. VAT is generally paid by businesses and is usually the difference between the VAT they have paid to other businesses and VAT charged to customers including individuals, businesses and central and local government.

The theoretical VAT tax liability is calculated by applying the relevant tax rates to the different types of expenditure. Data on expenditure is taken from the ONS’s macroeconomic aggregates including Consumer Trends which covers household expenditure, and the ONS’s UK National Accounts ‘Blue Book’ publication.

During 2024 to 2025, more than two thirds of the theoretical VAT liability was estimated to be from household expenditure, as is the case most years. Figure 2.2 shows that over half of the theoretical VAT liability from household expenditure was in the following categories: ‘restaurants and hotels’, ‘recreation and culture’, and ‘transport’.

Figure 2.2: Composition of expenditure liable to VAT at the standard or reduced rate for the household sector in 2024 to 2025 (percentage of expenditure by sector)

Category	Percentage
Restaurants and hotels	21.1
Recreation and culture	16.7
Transport	16.6
Miscellaneous	9.6
Household goods and services	8.6
Clothing and footwear	8.2
Alcohol and tobacco	5.5
Housing	5.1
Communication	3.5
Food and drink	3.5
Health	1.3
Education	0.4

Notes for Figure 2.2:

1. Numbers may not sum to 100% due to rounding.

2. ‘Transport’ includes private vehicle purchases, repair, and associated fuels and services.

3. ‘Housing’ includes materials and services for maintenance and repair, electricity, gas, and other fuels, but does not include rent or mortgages.

4. The numbers are derived from ONS Consumer Trends data.

Revisions

Overview

Since ‘Measuring tax gaps 2025 edition’, there have been upward revisions to the VAT gap between 2021 to 2022 and 2024 to 2025. The ONS have published revised expenditure data for households and for businesses and other sectors. These revisions are due to methodological improvements. As a result of revisions to ONS Consumer Trends and the Blue Book there is a £2.8 billion increase to the VAT gap for 2022 to 2023.

Technical improvements to the household model have increased the VAT gap over the time series.

Figure 2.3: Revisions to VAT gap since the ‘Measuring tax gaps 2025 edition’

Notes for Figure 2.3:

1. The full data series can be seen in the online tables.

2. 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 for 2019 to 2020 onwards is subject to more uncertainty than usual and should, therefore, be treated with extra caution. In particular, the uncertainty rating for the VAT tax gap estimate is ‘medium’, due to large revisions of the VAT gap in recent years.