The second estimate of the VAT Gap for 2013–14 was published in March. 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, VAT total theoretical liability (VTTL) – VAT receipts = VAT gap.

An equivalent way of defining the VAT gap is the VAT that is lost through debt, use of avoidance schemes, legal interpretation, error, failure to take reasonable care, evasion, the hidden economy and organised criminal attacks.

This release includes the second estimate of the VAT gap for 2013–14 based on known VAT receipts and a full year of consumer expenditure data. The forecast is based on the estimates for the UK economy produced by the Office for Budget Responsibility. The VAT gap for 2013–14 is estimated at around 10.3% of the estimated VTTL. This equates to £12.1 billion.