VAT tax gap estimated at £10.0bn for the financial year 2021-22

Ecospend, the leading payments platform in the UK, recently acquired by Trustly, outlines the potential of open banking payments to close the VAT tax gap which stands at £10bn, or 6.9% of the VAT receipts received by the government, for the financial year 2021-22.

Estimates from HMRC have found that open banking has been pivotal in closing the VAT gap, which is the difference between the expected VAT revenue and the actual amount collected, for the tax year 2021 to 2022. Falling from 7% the previous year, this signals the existing role that new payment technologies have played in reducing the gap and the crucial function they will have in ensuring that the tax gap continues its current trajectory.

Baseline reports, made in the financial year 2005-06, reported a VAT tax gap of 14.1%. Since then, there has been an overall downward trend, with only a few exceptions to the rule. 2019-2020, for example, saw a spike in the VAT gap to 8.5%, rising from 6.7% the previous year. Ensuring that the gap is closed, and any anomalous spikes minimised are clear priorities for the Exchequer.

Since 2005, technology has played a crucial role in optimising governmental and public sector payments. open banking, as the next stage in the evolution of digital payments, poses a significant advantage in ensuring that the gap can be closed and further tax revenue can be accurately accounted for. With direct account-to-account payments, the transfer of funds is instantaneous and fully accountable.

Ecospend’s ongoing open banking relationship with HMRC exemplifies the potential of open banking as a means of improving the efficiency of payment processing. As of February 2023, £2.3bn in Self-Assessment payments were made to HMRC using Ecospend’s ‘Pay-by-Bank’ technology ahead of 2023’s Self-Assessment deadline – 64% more than last year. The total volume of transactions was 47% higher than in 2022, with 869,000 payments having been made to HMRC using the technology.

HMRC’s use of Ecospend’s technology marked the first time an open banking payment method had been embedded within a government department. The technology used allows for a simple and user-friendly journey that relies on biometric IDs, encouraging user adoption. The decoupled journey solution employed by HMRC offers a flexible payment experience, reducing the rate of abandonment. The potential of this kind of technology to improve the fundamental infrastructure of government financing is clear.

James Hickman, chief commercial officer at Ecospend, commented: “The UK is the largest digital payments market in Europe and, in recent years, has seen a huge increase in adoption by new sectors: utilities, retail, consumer and the public sector. As a technology, open banking is approaching an inflection point. By accruing more day-to-day usage across different industries, the point of wide spread adoption comes closer to view.

“We’ve already seen open banking technologies work wonders for HMRC’s self-assessment regime and there’s no reason why this momentum can’t be carried forward and help in reducing the VAT tax gap and ensuring it stays low.”