Mind the VAT gap

27 March 2023
HMRC has recently published its second estimate of the VAT gap in the 2021/22 tax year which estimates the VAT gap to be £7.7bn, which is 5.4% of the net VAT collected in the tax year. The tax gap is essentially the difference between the net VAT receipts HMRC believes it should have received, known as the ‘Net VAT total theoretical liability’ or ‘NVTTL’, compared to the net collected by HMRC.  

The NVTTL for the second estimate is an update, using the consumer trends data from the Office for National Statistics (ONS) along with forecasting assumptions data from the Office for Budget Responsibility, of the preliminary VAT gap estimate in November 2022. This is based on the known VAT receipts, full year of consumer household expenditure data, government and housing expenditure data, and businesses making exempt supplies.

The latest VAT gap estimate of £7.7bn shows that the VAT gap is now estimated to be down £2.3bn from the estimate of £10bn in November 2022. This reduction HMRC believes is down to the ONS gaining a better understanding of changes that have occurred in expenditures since the Covid-19 pandemic. The new data suggests that household expenditure in ‘recreation and culture’, ‘household goods and services’ and ‘clothing and footwear’ was notably lower than previously estimated. This would reduce the NVTTL but there was some offsetting due to revisions in government current and capital expenditure which would increase the NVTTL. 

When comparing the second estimate of the VAT gap in 2021/22 to the final estimate of the VAT gap in 2020/21, there is also a reduction of £1.3bn (£7.7bn compared to £9bn). However, HMRC accepts that this estimate is subject to more uncertainty than usual due to various adjustments that were required. Such adjustments were required as a result of Covid-19 support that was in place in the tax year, such as the VAT deferment scheme and the reduced rate for the leisure and hospitality sector. HMRC has also noted that the tax gap for 2020/21 will be revised in the summer of 2023 when ‘Measuring Tax Gaps 2023’ is published. which includes the final estimate for the 2021/22 VAT gap.

Therefore, on the face of it, the estimated reduction in the VAT gap suggests that avoidance, evasion, and errors are reducing in UK VAT. This will be good news to HMRC and the treasury. However, given the number of adjustments required in this estimate and the fact the VAT gap in EU in 2020 was estimated at 9.1%, the final VAT gap figures that will be published in summer 2023 may be higher than those recently published.