Tag Archives: vat-gap

VAT: Mind the gap – HMRC latest figures

By Marcus Ward 23 June 2023

GOV.UK has published details of the most recent measurement of the tax gap for 2021-2022.

What is the tax gap?

The tax gap is measured by comparing the net tax total theoretical liability with tax actually paid. This is comparing the amount of tax HMRC expected to receive in the UK and the amount HMRC actually received.

The figures

The tax gap is estimated to be 4.8% of total theoretical tax liabilities, or £35.8 billion in absolute terms, in the 2021 to 2022 tax year.

Total theoretical tax liabilities for the year were £739.3 billion.

There has been a long-term reduction in the tax gap as a proportion of theoretical liabilities: the tax gap reduced from 7.5% in the tax year 2005 to 2006 to 4.8% in 2021 to 2022 – remaining low and stable between the years 2017 to 2018 and 2021 to 2022.

Criminal activity and evasion accounted for £4.1billion loss in tax collected.

30% of all underpayments of tax were due to a failure to take reasonable care, while 13% of instances were down to evasion.

A massive 56% of the tax gap is made up by small businesses (up from 40% of the total in 2017-18). Whether this is down to HMRC improving collection from large businesses or an increasing failure to crack down on small business is a moot point. It remains to be seen how HMRC react to this new information, but experience insists that small businesses may expect increased attention for the authorities.

The VAT gap

VAT represents 21% of the overall tax gap.

The VAT tax gap is 5.4%.

The absolute VAT gap is £7.6 billion.

The VAT gap has reduced from 14.0% of theoretical VAT liability in 2005 to 2006 to 5.4% in 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.

Information on the method used to estimate the VAT gap is here for those interested (I don’t imagine that there will be that many…).

So, £7.6 millions of VAT is missing. That seems an awful lot.

VAT: The tax gap was £35bn in 2019/20

By Marcus Ward 17 September 2021

HMRC has published details of the tax gap for 2019/20. This is the gap between the expected tax that should be paid to HMRC and what is actually paid. The headline was that the tax gap was 5.3%. which represents an estimated £35 billion.

Total tax liabilities for the year were £674 billion.

What is the tax gap?

The tax gap is the difference between the amount of tax that should, in theory, be paid to HMRC, and what is actually paid.

Why is it measured?

The tax gap provides tool for understanding the relative size and nature of non-compliance. This understanding can be applied in many different ways:

it provides a foundation for HMRC’s strategy – considering the tax gap helps the government to understand how non-compliance occurs and how it can be addressed
the analysis provides insight into which strategies are most effective at reducing the tax gap
it provides important information which helps HMRC understand its long-term performance
provides information to the public on tax compliance, creating greater transparency in the tax system.

Why is there a tax gap?

The tax gap arises for a number of reasons. Some taxpayers make simple errors in calculating the tax that they owe, despite their best efforts, while others don’t take enough care when they submit their returns. Legal interpretation, evasion, avoidance and criminal attacks on the tax system also result in a tax gap.

Analysis

Around £3.7 billion of the gap is estimated to be due to error and £3 billion due to the hidden economy.

The tax gap for wealthy individuals fell from £1.6 billion in 2018/19 to £1.5 billion in 2019/20

£15.1 billion of the gap is attributed to small businesses and £6.1 billion is attributed to large businesses, with £5 billion attributed to medium-sized firms.

Taxpayers paid more than £633.4 billion in tax during 2019/20, an increase of more than £100 billion since 2015/16, when the total revenue paid was £532.5 billion.

The tax gap for Income Tax, National Insurance contributions and Capital Gains Tax is 3.5% in 2019 to 2020 at £12.6 billion which represents the largest share of the total tax gap by type of tax.

VAT

The VAT gap was estimated to be £12.3 billion in tax year 2019 to 2020. This equates to 8.4% of net VAT total theoretical liability.

The VAT gap has increased from 7.0% in tax year 2018 to 2019 to 8.4% in 2019 to 2020. Growth in VAT receipts (1.8%) was slower than the growth in the net VAT total theoretical liability (3.3%).

Behaviour

HMRC estimate that the causes of the tax gap are:

Failure to take reasonable care £6.7bn 19%
Legal interpretation £5.8bn 16%
Evasion £5.5bn 15%
Criminal attacks £5.2bn 15%
Non-payment £4bn 11%
Error £3.7bn 10%
Hidden economy £3bn 8%
Avoidance £1.5bn 4%

Taxpayers

Tax gap by taxpayer groups:

Small businesses £15.1bn 43%
Large businesses £6.1bn 17%
Criminals £5.2bn 15%
Mid-sized businesses £5.0bn 14%
Individuals £2.6bn 7%
Wealthy £1.5bn 4%

The impact on the tax gap from the coronavirus lockdowns and economic downturn is likely to be first seen in the 2020/21 figures, which will be released next year. It will also be interesting to see how the fallout from Brexit is covered (if at all).

VAT EU Gap Report

By Marcus Ward 5 September 2019

Mind the gap

EU countries lost €137 billion in VAT revenues in 2017 according to a study released by the EC on 5 September 2019. The VAT Gap has slightly reduced compared to previous years but remains very high.

This gap represents a loss of 11.2% of the total expected VAT revenue.

During 2017, collected VAT revenues increased at a faster rate of 4.1% than the 2.8% increase of VAT Total Tax Liability (VTTL). As a result, the overall VAT Gap in the EU Member States saw a decrease in absolute values of about EUR 8 billion or 11.2% in percentage terms.

Member States in the EU are losing billions of Euros in VAT revenues because of tax fraud and inadequate tax collection systems according to the latest report. The VAT Gap, which is the difference between expected VAT revenues and VAT actually collected, provides an estimate of revenue loss due to tax fraud, tax evasion and tax avoidance, but also due to bankruptcies, financial insolvencies or miscalculations.

In 2017, Member States’ VAT Gaps ranged from 0.6% in Cyprus, 0.7% in Luxembourg, and 1.5% in Sweden to 35.5% in Romania and 33.6% in Greece. Half of EU-28 MS recorded a Gap above 10.1%.

Overall, the VAT Gap as percentage of the VTTL decreased in 25 Member States, with the largest improvements noted in Malta, Poland, and Cyprus and increased in three – namely Greece, Latvia, and Germany.

The variations of VAT Gaps between the Member States reflect the existing differences in terms of; tax compliance, fraud, avoidance, bankruptcies, insolvencies and tax administration. Other circumstances could also have an impact on the size of the VAT Gap such as economic developments and the quality of national statistics.

The UK

In the year 2017, in the UK the VTTL was £158421 millions of which £141590 millions was actually collected. This leaves a VAT gap for the UK of £16831 millions which represents 11% of the amount which is estimated was due to HMRC. About a mid-table performance compared to other Member States.