Official Statistics

VAT gap - Quality Report February 2023

Updated 6 March 2024

1. Contact

• Organisation unit - Knowledge, Analysis, and Intelligence (KAI)

• Name – VAT gap and own resources, Indirect Taxes, Customs & Co-ordination

• Mail address – 100 Parliament Street, SW1A 2NH

• Email - revenuemonitoring@hmrc.gov.uk

2. Statistical presentation

2.1 Data description

The publication provides an estimate of the tax gap for VAT, which is the difference between the amount of VAT that should, in theory, be paid to HMRC, and what is actually paid.

HMRC publishes:

• the preliminary estimate of the VAT gap for the latest outturn year in the autumn

• the second estimate of the VAT gap for the latest outturn year in the spring

• the third estimate of the VAT gap for the latest outturn year in the Summer as part of the ‘Measuring tax gaps’ publication, including a revised historical series

The VAT gap estimates for the preliminary and second estimate are published on the same day as the Office for Budget Responsibility (OBR) ‘Economic and fiscal outlook’ report which provides a forecast of receipts and a VAT gap projection. You can find further information about VAT gap projection on the OBR website.

HMRC has published ‘Measuring Tax Gaps’ on an annual basis since 2009.

2.2 Classification system

The VAT gap includes the total VAT gap, as a monetary value and as a percentage of theoretical tax liabilities.

The expenditure data captured in the VAT gap model is consistent with the UK National Accounts which is compiled in accordance with the European System of Accounts 2010 (ESA 2010). ESA 2010 is itself consistent with the standards set out in the United Nations System of National Accounts 2008 (SNA 2008).

2.3 Variable definitions

VAT gap

The ‘VAT gap’ is the difference between the net VAT total theoretical liability and actual net VAT cash receipts; this is provided both as a monetary value and as a percentage of theoretical tax liabilities.

Net VAT Receipts

The amount of net VAT receipts collected by HMRC in cash terms.

Net VAT total theoretical liability (net VTTL)

The total amount of VAT that should be collected in theory.

Financial year

The statistics are aggregated into financial years. A financial year stretches from 1 April until 31 March the following calendar year.

2.4 Statistical unit

The unit in the statistics is the expenditure of households, businesses making exempt supplies, government, charities and housing on which VAT should be payable within the UK.

2.5 Time coverage

The statistics cover the time period for the latest outturn financial year in the preliminary and second estimate publications. The full historical series is then provided in the annual ‘Measuring tax gaps’ publication which currently shows financial years going back to 2005 to 2006.

3. Statistical processing

3.1 Source data

The expenditure data used for the VAT gap estimates mostly comes from:

The UK National Accounts known as ‘Blue Book ‘and Consumer Trends publications produced by the Office for National Statistics (ONS).

3.2 Frequency of data collection

The ONS UK National Accounts and Consumer Trends data is published annually and quarterly respectively.

3.3 Data collection

The ONS data which is used in the VAT gap estimate is received by HMRC analysts by email when they become publicly available. This process also includes ONS providing HMRC with additional bespoke data breakdowns required to produce the VAT gap estimates.

3.4 Data validation

All statistics produced by HMRC must meet the standards in the Code of Practice for Statistics produced by the UK Statistics Authority and all analysts adhere to best practice as set out in the ‘Quality’ pillar.

Analytical Quality Assurance describes the arrangements and procedures put in place to ensure analytical outputs are error free and fit-for-purpose.

Every piece of analysis is unique, and as a result there is no single quality assurance (QA) checklist that contains all the QA tasks needed for every project. Nonetheless, HMRC analysts use a checklist that summarises the key QA tasks and is used as a starting point for teams when they are considering what QA actions to undertake.

Teams amend and adapt it as they see fit, to take account of the level of risk associated with their analysis, and the different QA tasks that are relevant to the work.

At the start of a project, during the planning stage, analysts and managers make a risk-based decision on what level of QA is required.

Analysts and managers construct a plan for all the QA tasks that will need to be completed, along with documentation on how each of those tasks are to be carried out and turn this list into a QA checklist specific to the project.

Analysts carry out the QA tasks, update the checklist, and pass onto the Senior Responsible Officer for review and eventual sign off.

The VAT gap estimate goes through multiple reviews, where VAT gap analysts, policy, compliance and Treasury stakeholders sense-check the data, methodologies, and outputs and apply wider understanding and context to them. Any inconsistencies between the estimate and the related datasets are identified and corrected during this process.

3.5 Adjustment

A portion of the net VAT total theoretical liability estimate is projected for the latest outturn year using assumptions from the Office for Budget Responsibility (OBR) until the actual expenditure data becomes available.

4. Quality Management

4.1 Quality assurance

All statistics produced by HMRC must meet the standards in the Code of Practice for Statistics produced by the UK Statistics Authority and all analysts adhere to best practice as set out in the ‘Quality’ pillar.

4.2 Quality assessment

The QA for this project adhered to the framework described in ‘4.1 Quality assurance’ and the specific procedures undertaken were as follows:

Stage 1 – Specifying the question

Up to date documentation was agreed with stakeholders setting out outputs needed and by when; how the outputs will be used; and all the parameters required for the analysis.

Stage 2 – Developing the methodology

Methodology was agreed and developed in collaboration with stakeholders and others with relevant expertise, ensuring it was fit for purpose and would deliver the required outputs.

Stage 3 – Building and populating a model

The publication was quality assessed as follows:

• analysis was produced using the most appropriate software and in line with good practice guidance

• data inputs were checked to ensure they were fit-for-purpose by reviewing available documentation and, where possible, through direct contact with data suppliers

• QA of the input data was carried out

• the analysis was audited by someone other than the lead analyst – checking code and methodology

Stage 4 – Running and testing the model

The publication was quality assessed as follows:

• results were compared with those produced in previous years and differences understood and determined to be genuine

• results were determined to be explainable and in line with expectations

Stage 5 – Drafting the final output

The final outputs were quality assessed as follows:

• checks were completed to ensure internal consistency (e.g. totals equal the sum of the components)

• the final outputs were independently proofread and checked

5. Relevance

5.1 User needs

The VAT gap estimate is a key element of the VAT receipts forecast published by the Office for Budget Responsibility. The overall picture helps HMRC to develop strategy and allocate resources.

VAT gap figures are published to provide a broad indicator of trends in compliance as it is important for HMRC to be transparent on our thinking on this important issue of public interest.

5.2 User satisfaction

HMRC is committed to providing impartial quality statistics which meet our users’ needs. We encourage our users to engage with us so that we can improve our National and Official Statistics and identify gaps in our statistics.

If you would like to comment on these statistics or have any enquiries, please use the statistical contacts at the end of the report.

5.3 Completeness

VAT gap estimates are published on the HMRC GOV.UK website and can be accessed through https://www.gov.uk/government/statistics/vat-gap-estimates/. The publication itself contains the headline figures for the latest outturn year.

6. Accuracy and reliability

6.1 Overall accuracy

The VAT gap estimate is mostly based on third party ONS data. These figures are outside the managerial control of HM Revenue and Customs (HMRC). The data provided by ONS is classed as ‘National Statistics’ and considered to be of the highest quality. To ensure the data received is complete and there are no errors, the data are sense checked and queried, if necessary, with the relevant contact in ONS.

The 2021 to 2022 uncertainty rating assessment for the VAT tax gap estimate is ‘low’. This means that the model captures the tax base and its population, the methodology is robust, and it uses independent ONS data. Assumptions in the model are mostly low-risk and granular. Using ONS expenditure categories enables the appropriate VAT rates to be applied to estimate the total theoretical tax liability.

Sources of uncertainty include a number of necessary assumptions and a small, required element of forecasting.

6.2 Sampling error

No sampling takes place within the VAT gap estimates; however the underpinning ONS data will be from sampling surveys and will contain such errors.

6.3 Non-sampling error

Coverage error

The VAT gap estimates are modelled using a ‘top-down’ approach which is comprehensive and objective. There are some areas in the model where ONS data is supplemented as further information is needed to estimate the VAT total theoretical liability. This is done by using other third party or internal HMRC information / expert judgement.

Measurement error

The main sources of measurement error could be related to errors in the underlying ONS expenditure data or the way in which the expenditure is treated within the VAT gap model to calculate the VAT total theoretical liability.

Nonresponse error

There is no non-response error within the VAT gap estimation; however the underpinning ONS data used for the VAT gap estimates will be from sampling surveys and will contain such errors.

Processing error

It is possible that errors exist in the models used to analyse the data and produce the statistics. This risk is reduced through applying a robust process for updating the models, QA of the changes, and thoroughly documenting, reviewing, and testing the models that are used on a regular basis. Furthermore all model updates are scrutinised by the VAT gap working group (comprising tax gaps analysts and policy experts) before they are approved to be used for publication.

6.4 Data revision

Data revision – policy

The United Kingdom Statistics Authority (UKSA) Code of Practice for Statistics requires all producers of statistics to publish transparent guidance on the policy for revisions.

6.5 Data revision

Revisions to ONS UK National Accounts and Consumer Trends data are a normal part of the quarterly and the annual process which reconciles the different measures of Gross Domestic Product (GDP) and incorporates the latest available information from various data sources. It also provides the opportunity to review methods and introduce improved methodology. Therefore, the VAT gap estimates will fluctuate as ONS update their data and methodology on a regular basis; however, the trend is usually broadly unaffected by these revisions which is the reason it is recommended that users consider the long-term trend rather than year to year changes in the VAT gap.

Seasonal adjustment

No seasonal adjustment is used within the VAT gap estimates and is therefore not relevant to the publication.

7. Timeliness and punctuality

7.1 Timeliness

The publication is released as soon as possible after the estimates are produced and the quality assurance has taken place. The publication date for each release is pre-announced in advance and has been published to time.

For VAT gap estimates published, there is around a 10-month lag between publication and the latest outturn year.

7.2 Punctuality

In accordance with the Code of Practice for Statistics, the exact date of publication will be given not less than one calendar month before publication on both the Schedule of updates for HMRC’s statistics and the Research and statistics calendar of GOV.UK.

Any delays to the publication date will be announced on the HMRC National Statistics website.

The full publication calendar can be found on both the Schedule of updates for HMRC’s statistics and the Research and statistics calendar of GOV.UK.

There have been no incidents of late publication of the bulletin since the last Quality Report was produced.

8. Coherence and comparability

8.1 Comparability over time

The VAT gap estimates are subject to revision due to improvements in the data available, the methodologies used, and projections based on more recent years. All revisions made to previous years’ estimates, and the reasons for the changes are clearly shown and explained within the publication.

The VAT gap as a percentage of the net VAT total theoretical liabilities, as opposed to monetary terms, gives a better measure of compliance over time because it takes out some of the effects of inflation and changes to tax rates.

8.2 Coherence – cross domain

No known issues regarding coherence between domains.

Coherence – sub-annual and annual statistics

All statistics are presented as annual outputs. No coherence issues exist.

Coherence – national accounts

The expenditure data used to produce the VAT gap estimates are coherent with the national accounts framework and are based on current prices (i.e. non-inflation-adjusted) data.

8.3 Coherence – internal

Rounding of numbers may cause some minor internal coherence issues as the figures within a table may not sum to the total displayed. Effort has been made to ensure totals between tables remain consistent where appropriate.

9. Accessibility and clarity

9.1 News release

There were no press releases linked to this data over the past year.

9.2 Publication

The VAT gap estimate, and associated commentary is publicly available (https://www.gov.uk/government/statistics/vat-gap-estimates/) and is published on the same day as the OBR ‘Economic and fiscal outlook’ report at 15:00 pm to ensure the VAT gap publication is released after any Chancellor Statement, and on the pre-announced date of release.

The tables and associated commentary are published in Hypertext Markup Language (HTML) format.

The document complies with the accessibility regulations set out in the Public Sector Bodies (Websites and Mobile Applications) (No. 2) Accessibility Regulations 2018.

Further information can be found in HMRC’s accessible documents policy.

9.3 Online databases

This analysis is not used in any online databases.

9.4 Micro-data access

Access to this data is not possible in micro-data form, due to the ONS data being aggregated and the responsibilities around maintaining confidentiality of respondent information.

9.5 Other

There aren’t any other dissemination formats available for this analysis.

9.6 Documentation on methodology

Further information on the methodology used to estimate the VAT gap can be found in ‘Measuring tax gaps 2022 edition - Methodological annex’, Chapter D

9.7 Quality documentation

All statistics produced by KAI, must meet the standards in the Code of Practice for Statistics produced by the UK Statistics Authority and all analysts adhere to best practice as set out in the ‘Quality’ pillar.

Information about quality procedures for this analysis can be found in section 4 of this document.

10. Cost and burden

The VAT gap publication can take up on average 12 working days for the main analyst to complete the publication and conduct QA, the team leader further sense checking and signing off. The annual cost, therefore, is around 12 days a year (this covers the preliminary and second estimate as well as the annual ‘Measuring tax gaps’ publication).

The regular updates needed to maintain the model are the most time-consuming aspect of the publication as it encompasses the retrieval and aggregation of several data sources, which in some cases can be lengthy procedures. The number of checks to the data is naturally large, although it could be reduced with further scrutiny.

There is no respondent burden since most of the data is taken directly from the Office for National Statistics.

11. Confidentiality

11.1 Confidentiality – policy

HMRC has a legal duty to maintain the confidentiality of taxpayer information.

Section 18(1) of the Commissioners for Revenue and Customs Act 2005 (CRCA) sets out our duty of confidentiality.

This analysis complies with this requirement.

11.2 Confidentiality – data treatment

The statistics in these tables are presented at an aggregate level so identification of individuals, companies or other organisations is not possible.