Total UK VAT receipts rose 6% in the financial year to April 2024, despite no changes to tax rates and a net fall in the number of VAT-registered businesses.
The figures from HMRC’s latest annual VAT survey show a continuing trend of increased earnings from VAT since post-Brexit changes to the way receipts are calculated were introduced in 2021.
While some of these increases can be explained by rising inflation, the fact that VAT receipts grew even more in 2023/24 than they did in the previous tax year as inflation started to come down again suggests that consumption remained steady despite the high-profile cost of living crisis and the supposed impact on household budgets and consumer confidence.
With the Consumer Price Index (CPI) falling back to just 1.7% in September this year, prompting the Bank of England to cut interest rates in November, evidence that overall consumption levels have ridden out the turbulence of the past three years relatively unscathed is a positive sign that better times could be around the corner.
The latest figures also show that VAT repayments to businesses for purchases of VAT-rated goods rose by £12.2bn, an indication of healthy levels of spending by businesses, too.
Tax gap increases
However, one note of caution lies in the fact that the so-called ‘tax gap’ – the difference between projected VAT liabilities from returns and actual receipts – has gone up again after a long period of decline. Looking at what HMRC calls ‘Home’ VAT from domestic commerce, liabilities were calculated to be £173.4bn in 2023/24, versus receipts of $158.9bn – a gap of $14.5bn, not too far off double the £8.1bn recorded in 2022/23.
While miscalculations do play a part in the tax gap, a large discrepancy is also usually seen as an indicator of VAT fraud and evasion, or of increases in company insolvencies. In 2023, there were 25,163 company insolvencies in the UK, the highest figure since 1993. This also partly helps to explain 200,000-plus drop in the number of VAT-registered companies.
Most sectors saw a decline in the number of VAT-registered companies in 2023/24, although by far the biggest hit was taken by Hospitality (Accommodation and Food Service), which saw a sharp decline of some 61,550 VAT-paying businesses. The biggest sector in terms of number of VAT-registered companies is Wholesale & Retail (456,410), followed by Construction (325,210) and Professional, Scientific and Technical Activities (323,640).
Wholesale & Retail is also the largest contributor to VAT of all sectors, with a net Home VAT liability of £55.5bn in 2023/24. This grew by £5.8bn from the previous year, a 12% increase.
VAT liabilities in the Construction sector saw the biggest percentage increase, up 44% to £10.9bn. This could partly be down to a decline in VAT-exempt new build activity, while renovations and extensions to existing properties in the residential sector have been on the rise. Read our Construction Sector Report to find out more.
From April 2024, the VAT registration/deregistration threshold increased from £85,000 to £90,000, suggesting that the number of businesses liable for VAT will fall again. For the best professional advice on VAT registrations, returns, compliance and general advisory, contact a VAT specialist near you today.
