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Summary

The VAT gap methodology uses a top-down approach which calculates the difference between the total theoretical tax liability and total VAT receipts. This 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.

More information on the tax gap uncertainty assessment can be found in the ‘Methodological annex’.

Overview

Figure 2.1 shows the VAT gap time-series in absolute terms and as a percentage of theoretical VAT liability.

The VAT gap shows a downward trend, falling from 13.8% to 5.0% between tax years 2005 to 2006 and 2023 to 2024.

Figure 2.1: VAT gap by value and as a percentage of theoretical tax liability, 2005 to 2006 up to 2023 to 2024

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 5.0% of theoretical VAT liability, or £8.9 billion in absolute terms, in the 2023 to 2024 tax year.

The VAT gap has reduced from 13.8% of theoretical VAT liability in 2005 to 2006 (or £11.6 billion) to 5.0% in 2023 to 2024 (or £8.9 billion).

The VAT gap shows a long-term downward trend long-term downward trend from the 2005 to 2006 tax year to the 2023 to 2024 tax year. During the coronavirus (COVID-19) period of 2020 to 2021 and 2021 to 2022 the VAT gap was lower than previous years, falling from 8.1% in 2019 to 2020 to 5.4% in 2020 to 2021. The VAT gap increased to 7.8% in 2022 to 2023 and fell to 5.0% in 2023 to 2024.

The 2023 to 2024 VAT gap has been revised downwards from both the preliminary estimate of £9.5 billion (equating to 5.4% of the VAT theoretical liability) published alongside ‘Autumn Statement 2024’ in November 2024 and the second estimate of £9.5 billion (equating to 5.3% of VAT theoretical liability), published alongside ‘Spring Budget 2025’ in March 2025.

The 2022 to 2023 VAT gap has increased from 4.9% of the theoretical VAT liability (equating to £8.1 billion) published in ‘Measuring tax gaps 2024 edition’ to 7.8% of the theoretical VAT liability (£13.1 billion) in ‘Measuring tax gaps 2025 edition’. This is discussed in detail in the revisions section.

Table 2.1: Estimated VAT gap (£ billion)

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.

Estimated VAT gap	2005-06	2017-18	2018-19	2019-20	2020-21	2021-22	2022-23	2023-24
Theoretical VAT liability	84.6	137.6	142.2	146.8	127.6	143.2	169.5	176.5
VAT receipts	72.9	126.5	132.5	129.8	101.6	157.5	158.0	168.3
VAT receipts (with adjustment for VAT payments deferral)	Ìý	Ìý	Ìý	134.8	120.6	134.8	156.4	167.6
VAT gap	11.6	11.2	9.7	12.0	7.0	8.4	13.1	8.9
VAT gap of which non-payment	0.9	1.6	1.6	2.2	2.4	2.6	3.6	2.5

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 (ONS) on consumer expenditure.

4. For VAT, the non-payment tax gap is an estimate of eventual non-payment attributable to the year of VAT debt creation.

5. The year 2005 to 2006 has been included to illustrate the long-term trend.

6. From 2019 to 2020 through to 2022 to 2023, the 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.

7. The theoretical VAT liability is the amount of VAT that should be paid in theory. This is calculated by applying the rate of VAT on expenditure where VAT should be payable, assuming that there is no fraud, avoidance, or losses due to error or non-compliance.

8. The theoretical VAT liability includes irrecoverable VAT, which is the VAT paid on ‘finally taxed expenditure’ which cannot be reclaimed, for example by those not registered for VAT.

The VAT gap is the difference between two 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 year-on-year fluctuations.

Calculating the VAT theoretical liability

Overview

There are three rates of VAT that can be charged on taxable goods and services: the standard rate, the reduced rate and the zero rate. Some expenditure is exempt from VAT such as postage stamps, financial and property transactions. VAT is generally paid by businesses and is usually the difference between the VAT they have paid to other businesses and VAT charged to customers including individuals, businesses and central and local government.

The VAT theoretical tax liability is calculated by applying the relevant tax rates to the different types of expenditure. Data on expenditure is taken from the ONS’s macroeconomic aggregates including Consumer Trends which covers household expenditure, and the ONS’s UK National Accounts ‘Blue Book’ publication.

During 2023 to 2024, more than two thirds of the theoretical VAT liability was estimated to be from household expenditure, as is the case most years. Figure 2.2 shows that over half of the theoretical VAT liability from household expenditure was in the following categories: ‘restaurants and hotels’, ‘transport’, and ‘recreation and culture’.

Figure 2.2: Composition of expenditure liable to VAT at the standard or reduced rate for the household sector in 2023 to 2024 (percentage of expenditure by sector)

Category	Percentage
Restaurants and hotels	21.2
Transport	16.5
Recreation and culture	16.5
Miscellaneous	10.3
Household goods and services	9.5
Clothing and footwear	8.6
Alcohol and tobacco	5.3
Housing	3.6
Communication	3.5
Food and drink	3.5
Health	1.5
Education	0.0

Notes for Figure 2.2:

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

2. ‘Transport’ includes private vehicle purchases, repair, and associated fuels and services.

3. ‘Housing’ includes materials and services for maintenance and repair, electricity, gas and other fuels. Housing includes neither rent nor mortgages.

4. The numbers are derived from ONS Consumer Trends data.

Revisions

Overview

Since ‘Measuring tax gaps 2024 edition’, there have been a number of revisions to the 2022 to 2023 VAT gap. The ONS have published revised expenditure data for households and for businesses and other sectors. These revisions follow detailed statistical work to take account of the challenges of measuring expenditure during the COVID-19 period. As a result of revisions to Consumer Trends and the ‘Blue Book’ there is a £4.0 billion increase to the VAT gap for 2022 to 2023.

Following a review of accounting data, HMRC’s official statistics on VAT receipts have also been revised since ‘Measuring tax gaps 2024 edition’. VAT receipts for 2022 to 2023 are now estimated to be £1.7 billion lower than the figures used in ‘Measuring tax gaps 2024 edition’.

The net effect of these revisions, together with the effect of technical updates to the modelling process, is £5.0 billion, equivalent to a 2.9 percentage point increase in the VAT gap for 2022 to 2023. Revisions for other years are shown in Figure 2.3.

Figure 2.3: Revisions to VAT gap since the ‘Measuring tax gaps 2024 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 for 2019 to 2020 onwards is subject to more uncertainty than usual and should, therefore, be treated with extra caution. In particular, the uncertainty rating for the VAT tax gap estimate is ‘medium’, up from ‘low’ in ‘Measuring tax gaps 2024 edition’, due to the large revision to the VAT gap for 2022 to 2023.

HMRC only publishes a revised historical VAT gap series once a year in the ‘Measuring tax gaps’ publication.

The VAT gap preliminary estimate for 2024 to 2025 is expected to be published in autumn 2025 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 2026’.

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.