UK missing VAT grows by £1.3 billion

Figures released by the HMRC show that the UK VAT Gap has grown to £13.3billion in 2017/18, up from £12.0billion in 2016/17. The UK collected £125billion in VAT in the last financial year, which accounts for about 20% of all tax revenues.

The VAT Gap measures the difference between expected revenues from the sales of goods and services subject to VAT versus actual payments to HMRC. It is made up of: VAT insolvencies, bankruptcies, fraud, administrative errors and legal tax optimisation.

Budget measures to close gap

In last week’s budget, the Chancellor, Philip Hammond, announced measures reduce VAT lost on uncompleted sales, and avoidance though overseas branch routing services in the insurance sector. He also plans to give HMRC preferred status in bankruptcies which could raise £600million per annum.

HMRC has attributed £3.5 billion of the VAT gap to what it calls “avoidable taxpayer mistakes” in their VAT returns. The plans to introduce digital filings for 1.1million businesses from April 2019 – ‘Making Tax Digital’ – should shave off over £0.5 billion of the gap by eliminating 1st some basic manual errors. Possible extensions of the VAT data required in 2020 could help drive this number down further.