In light of Brexit and coronavirus the UK's theoretical VAT receipts (calculated by government boffins) in the tax year ended March 2021 fell by more than 11 per cent (around £17bn) to £130bn. Therefore, it is perhaps not surprising that the VAT gap (the difference between this theoretical VAT receipt figure and the actual VAT receipts) fell from £12.3bn to £9.8bn. What is more interesting is a close consideration of the opportunity to learn how shifts in government policy have affected tax receipts. What are the causes for these trends, and can any lessons be learnt from the latest VAT collection data?
In publishing the latest data on the VAT gap, HMRC was at pains to remind us of the reasons for a drop in VAT receipts during 2020-2021; the reduced rate of VAT temporarily applied to the hospitality industry and the zero-rate relief for personal protective equipment. HMRC has also assumed in the numbers that those taxpayers that have deferred payment of VAT under the VAT deferral new payment scheme will settle their liabilities in full. However, this has meant that the data should be read, in HMRC's words 'with extra caution'.
HMRC is to be congratulated for maintaining and publishing detailed data not only on theoretical VAT receipts during a time of pandemic, but also estimates of the VAT gap. This is particularly important for two reasons.
First, the effect on the VAT gap provides an important learning opportunity in respect of broader taxpayer behaviours, not only in a period of difficulty but also during more stable times.
Second, with MTD soon to be introduced to aspects of income tax, we urge HMRC to review this data critically to determine whether MTD for VAT has in fact reduced the VAT gap to the extent it is hoped that MTD for income tax will reduce the income tax gap.
If, on reflection, it is felt that evidence is lacking, then questions must be raised as to the validity of introducing MTD for income tax, in view of the significant demands on the time of businesses and their advisors when they should be concentrating on helping the UK achieve a measure of economic recovery.