Treasury overestimated ‘VAT gap’ figures

Treasury officials on their way to work have to not only mind the gap on the
tube, but also the “VAT gap” when they get to their desks.

The gap is the difference between what the Treasury should collect in VAT and
what is actually receives. The figure usually runs to billions, but it seems
officials may have overestimated the problem in 2009/10.

In a little-read book that comes as part of the Budget pack, figures show
that the estimated shortfall in VAT was expected to be 17.5%, or around £12.2bn.
But it seems those crunching the numbers played it a little too safe. The Audit
of Assumptions Budget 2010 shows that the expected gap is now 13.2%, or roughly
£9.2bn – a £3bn improvement and a handy lift for Alistair Darling’s Budget
figures.

The figures are still to be confirmed and hardly form a solution to the
deficit, but helpful all the same.

A statement by the National Audit Office said estimates for 2009 had allowed
for additioned VAT debt because of the recession. But the big impact did not
materialise.

Britain compares farely well with Europe. Figures released by the European
Commission last year showed that, in 2006, the community-wide VAT gap stood
somewhere between 12 and 14% or up to EUR113bn.

In recent years the VAT gap has been exacerbated by the prevalence of
carousel fraud. Ministers have also blamed the tax profession in the past for
developing sophisticated avoidance schemes. HMRC had been set a target of
reducing the gap to 12% by 2006. Figures so far show that tax of officials still
have some way to go to achieve that.

IN OUR VIEW

The government is expecting to take up to £78bn in VAT revenues in 2010/11.
It’s a large contribution to the exchequer and needs protecting. But even a
reduction in the tax gap leaves HMRC missing its target. Time to pay
arrangements have allowed people to postpone payments, but expect fresh
aggression on VAT when officials judge the crisis is over.

Further reading:

NAO’s
Audit of Assumptions for the Budget 2010