Official Statistics

2. Tax gaps: VAT

Updated 22 June 2023

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 5.4% of theoretical VAT liability, or £7.6 billion in absolute terms, in the 2021 to 2022 tax year.

The VAT gap shows a downward trend, falling from 14.0% to 5.4% between tax years 2005 to 2006 and 2021 to 2022.

Figure 2.1: VAT gap by value and as a percentage of theoretical tax liability, 2005 to 2006 up to 2021 to 2022

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 5.4% of the theoretical VAT liability, or £7.6 billion in absolute terms, in the 2021 to 2022 tax year.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 (or £11.9 billion) to 5.4% in 2021 to 2022 (or £7.6 billion).

The 2021 to 2022 VAT gap has been revised downwards from both the preliminary estimate of £10.0 billion (equating to 6.9% of the VAT theoretical liability) published alongside ‘Autumn Statement 2022’ in November 2022 and the second estimate of £7.7 billion (equating to 5.4% of VAT theoretical liability), published alongside ‘Spring Budget 2023’ in March 2023.

The VAT gap has increased from 5.0% in tax year 2020 to 2021 to 5.4% in 2021 to 2022, as the theoretical VAT liability is estimated to have increased at a slightly faster rate than VAT receipts.

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

Table 2.1: Estimated VAT gap (£ billion)

Estimated VAT gap	2005-06	2015-16	2016-17	2017-18	2018-19	2019-20	2020-21	2021-22
Theoretical VAT liability	84.8	125.7	131.4	137.1	141.5	146.1	127	141.7
VAT receipts	72.9	114.9	119.8	126.4	132.5	129.8	101.6	157.5
VAT receipts adjusted for VAT payments deferral						134.8	120.6	134.2
VAT gap	11.9	10.8	11.7	10.6	9	11.3	6.3	7.6
VAT gap of which non-payment	—	1.6	1.5	1.6	1.6	2.2	2.4	2.3

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 on consumer expenditure.
4. The contribution of non-payment to the VAT gap is defined as the amount of VAT declared by businesses, but not paid to HMRC.
5. 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.
6. The year 2005 to 2006 has been included to illustrate the long-term trend.

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.

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.

The 2019 to 2020, 2020 to 2021 and 2021 to 2022 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. The adjusted VAT receipts figures are shown in a separate row in Table 2.1 above.

Additional findings

Overview

The VAT gap peaked at 14.4% 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 2021 to 2022 tax year. During the COVID-19 period of 2020 to 2021 and 2021 to 2022 the VAT gap was markedly lower than previous years, falling from 7.7% in 2019 to 2020 to 5.0% in 2020 to 2021, and increasing slightly to 5.4% in 2021 to 2022.

During 2021 to 2022, more than two thirds of the theoretical VAT liability was estimated to be from household consumption. 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: Composition of expenditure liable to VAT at the standard or reduced rate for the household sector in 2021 to 2022 (percentage of expenditure by sector)

Category	Percentage
Restaurants and hotels	17.4%
Transport	16.8%
Recreation and culture	16.2%
Household goods and services	10.6%
Miscellaneous	9.3%
Clothing and footwear	8.4%
Alcohol and tobacco	6.7%
Housing	5.4%
Communication	3.9%
Food and drink	3.7%
Health	1.7%
Education	0.1%

Notes for Figure 2.2

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

Figure 2.2 shows that slightly over half of the theoretical VAT liability from household consumption was in the following categories: ‘restaurants and hotels’, ‘transport’, and ‘recreation and culture’. Compared with the pre-COVID-19 years, the ‘restaurants and hotels’ category accounted for a lower proportion of the household consumption liable to VAT, due to the impacts of policy measures introduced in response to COVID-19, including a reduction in the VAT rate introduced for the hospitality sector in July 2020.

Revisions

Overview

Figure 2.3 shows the revisions to the VAT gap since the publication of ‘Measuring tax gaps 2022 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 0.6 percentage points or £0.7 billion per annum. For the year 2020 to 2021, the change is larger, with a 2.0 percentage point (or £2.7 billion) reduction 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:

• the ‘Consumer trends’ publications (up to and including quarter 4 2022), which is used to capture the expenditure of the household sector

• the ‘Blue Book 2022’ 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 2022’ and ‘Consumer trends’ quarter 1 to 4. The Office for National Statistics has gained a more refined understanding of the changes that occurred in expenditure since the start of the COVID-19 pandemic. This is as a result of the annual supply and use balancing process, which brings together detailed data on the 3 approaches (production, income and expenditure) to measuring gross domestic product (GDP), covering for the first time the year 2020.

• 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 2023’ publication is not set to be released until after ‘Measuring tax gaps 2023 edition’ in autumn 2023, 2021 to 2022 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 2021 to 2022 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 2022 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 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 2022 to 2023 is expected to be published in autumn 2023 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 2024’.

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.