Chancellor announces 2024 consultation on whether private hire fares should be subject to VAT

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Chancellor Jeremy Hunt used the Autumn Statement to launch a consultation into whether private hire operators should charge VAT on fares. The consultation, which follows the recent Sefton High Court ruling, will be launched in the first half of 2024.

The Autumn Statement said: “ The government will consult in early 2024 on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC.” While the judgement in the Sefton case did not specifically relate to VAT, it ruled that the passenger’s contract was with the operator, not the driver. This has caused confusion as to whether VAT is chargeable on fares or not. When it was assumed that the contract was with the driver, there was no likelihood of VAT being charged as very few drivers earn sufficient money to need to register for VAT.

But operators are VAT-registered, and could be liable for VAT – if such a ruling were made. Some operators only charge VAT on the margin, using a loophole known as the Tour Operators’ Scheme. This means they only charge VAT on their cut from the fare, with the driver’s proportion not subject to VAT.  The scheme effectively means VAT is only charged (at 20%) on the operator’s commission (usually 15%), so the VAT element equates to roughly 3% of the fare charged. No VAT is paid on the driver’s earnings.

Some operators have started lobbying for VAT to be zero-rated on private hire journeys, which would bring it into line with hackney taxis, and indeed bus and train fares. They argue that increasing fares by 20% at a time of economic hardship would hit poorer people who rely on private hire vehicles. This would reduce demand, causing a detrimental effect on the industry.

However, Addison Lee, which serves a predominantly business clientele, started charging VAT on fares in 2021. Chief executive Liam Griffin said: “We welcome the Chancellor’s commitment today to reviewing VAT on private hire journeys. After the Court ruling against Uber in 2021, Addison Lee took the decision that the right thing to do – legally and morally – was to apply VAT on the full fare paid by our passengers. No other major operator has followed us in paying the full VAT on the full fare. In fact, the absence of clear guidance from HMRC means that most have sought to pay as little VAT as possible.”

He continued: “This leaves our business, as well as other long-standing operators in our local communities, at a competitive disadvantage and potentially represents a significant loss in tax revenue due to the Exchequer. It is crucial that the Government seeks to level the playing field in the private hire industry in London and across the country, and we would welcome clear guidance from HMT and HMRC on how VAT should be applied and enforced.”

Mariusz Zabrocki, UK head of ride-hailing app FreeNow, said: “We’re glad to see that the Chancellor has announced the Government’s intention to consult on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton and its consequences for the VAT Treatment of Private Hire Vehicles.

The current VAT status has already led to a reduction of investment in the sector, which is not ideal considering the current socio-economic landscape and the fact that so many people rely on this industry to make ends meet.

“Private Hire Vehicle drivers play a key role in the overall transport system and the local economy. If we look at other transport modes, such as buses, trains, or even ferries, canal boats or limousines, they are all zero-rated. The private hire vehicle service must not be regarded as a luxury for the purposes of VAT. That’s why FreeNow continues to call for a lower level of VAT for PHV operators to secure a VAT regime that is fair for the industry and avoids an unnecessary increase in fares for passengers.”