What is the VAT gap?
The VAT gap is the difference between the amount of VAT that should, in theory, be collected by HMRC, against what is actually collected. The ‘VAT total theoretical liability’ (VTTL) represents the VAT that should be paid if all businesses complied with both the letter of the law and HMRC’s interpretation of the intention of Parliament in setting law (referred to as the spirit of the law).
In other words, VTTL – VAT receipts = VAT gap.
This is HMRC’s second estimate of the VAT gap for 2014-15 (£ billion) and may be summarised as:
Net VTTL £124.9
Net VAT receipts £111.4
VAT gap £13.5
VAT gap 10.8%
The previous year’s figures (2013-2014) estimated the VAT gap at £13.1 billion (11.1% of the VTTL).
The consumer expenditure data accounts for around two thirds of the VTTL. The remaining one third of the VTTL is comprised of government and housing expenditure data, and businesses making exempt supplies.
For those of a statistical nature, the methodology behind the figures is here