Uber has mounted a legal challenge in Sefton, to charge VAT on all fares. Should we be worried?

Much of the chatter around the stands at recent taxi trade events was about Sefton. Not the heroic police horse, but a forthcoming court case involving, once again, Uber, in the Merseyside borough of Setfton.

There’s much wailing and gnashing of teeth about this case, with the most extreme opinions suggesting a kind of armageddon for the private hire industry. Why? Because we’ll all be forced to pay VAT, apparently.

The case has its origins in last year’s Supreme Court ruling about Uber’s London operations. Lord Leggatt’s ruling meant that a passenger was entering into a contract with the operator when they made a booking, instead of the passenger having an agreement with the driver. This logically stems from the ruling that Uber’s drivers were “workers”, not independent contractors.

Uber has announced that it will soon have to start charging its UK customers VAT at 20% after a High Court judgement, pushing up the cost of rides.

A judge has ruled that UK private hire taxi operators must make contracts with their customers. This could have massive consequences for the industry.

This follows on from our previous coverage of Uber, outlining that Uber drivers should be treated as workers, not contractors.

The Supreme Court’s judgement is still rippling through Uber’s working model
On top of the human rights implications, as well as the effect on sick pay and holiday pay, the ruling has broader implications for the relationship between operators and passengers. Lord Leggatt’s ruling meant that operators were essentially entering into a contract with their customers when they accepted a booking, instead of the passenger having an agreement with the driver.

The VAT implication is clear. Uber is a VAT-registered business, whereas most private hire drivers are not – they don’t earn enough to reach the threshold for VAT. The Supreme Court’s ruling that the contract is between the passengers and the operator (Uber), not the driver, so VAT must be paid on every journey.

This means basically a 20% fare increase, but collection of tax revenue into the economy that was previously being avoided. Uber didn’t like the ruling, but it has gone along with it, and now it wants to see if it applies nationally, not just in London.

This is because London’s private hire sector is governed by a different act of parliament, the Private Hire Vehicles (London) Act 1998.

The court ruling in London stated: “In order to operate lawfully under the Private Hire Vehicles (London) Act 1998 a licensed operator who accepts a booking from a passenger is required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.”

Transport for London has accepted the judgement, and has issued guidance to all London operators, with a view to them complying with the ruling – and therefore charging VAT. Operators are having to change their business model status to “merchant” in order to comply – and most appear to be falling into line.

Why is this a problem? For any corporate clients, paying VAT on a cab fare is no big deal. It can be claimed back. And with apps such as Uber’s offering cashless payments, it’s pretty easy to account for it.

It’s more problematic for private jobs, where a £50 fare becoming a £60 fare could make a difference. Then again, one could argue that fares were too low in any case, and perhaps the VAT imposition gives operators a chance to reset their fare structure – so the £50 fare starts off as a £60 fare, and VAT makes it a £72 fare.

Kevin Sefton, CEO of personal tax app Untied, said: “As a big company, Uber should be charging VAT on its services – and should have been in the past. This could add up to £1bn or more in back taxes.”

He added: Uber customers are likely to see prices rise to take account of the VAT. From a driver perspective, demand could possibly fall as a result of these price rises, or they may need to share some of the hit.”

Uber is now acting as if it has some kind of moral high ground (having lost its case), recently stating: “Every private hire operator in London will be impacted by this decision, and should comply with the Supreme Court verdict in full. All operators will need to carefully consider the court’s judgement and take steps to ensure that they comply with it, including considering whether any changes to their way of working are required”.

Which brings us to Sefton. Uber is now taking Sefton council to court in order to test whether this ruling should be applied outside of TfL’s jurisdiction.

Uber is taking Sefton Council to court, seeking the following declaration from the High Court, which would bring Sefton into line with London:

“In order to operate lawfully under Part II Local Government (Miscellaneous Provisions) Act 1976, a licensed operator who accepts a booking from a passenger is required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.”

Sefton Council issued a notice “to the attention of interested parties, including licensed PHV operators and licensed drivers, and anyone who wishes to join into these proceedings.”

What will happen if Uber wins? If the court rules in line with London, then Uber will have to pay VAT in Sefton. It is safe to assume that it will interpret this as being the case in other areas too, and we can expect Uber to start charging VAT wherever it operates its direct model.

But then what happens to the many operators that are now taking on Uber jobs via the Local Cab network, run via Autocab’s iGo network? Will these operators be expected to pay VAT as well? Whose contract is it, when a passenger in Manchester opens up the Uber app, but books a Local Cab car from, say, Street Cars?

Given the separation between the Uber services and the Local Cab services, it’s likely that the “operator” is Street Cars. The Sefton ruling will clarify whether the contract is with the operator (Street Cars) rather than the Street Cars driver, who may be a self-employed contractor. In which case, VAT would be charged, and the fare would rise (unless VAT is already being charged, which may be the case, in which case nothing happens!)

Not all operators agree with the fundamental principle established in the Supreme Court that taxi or private hire drivers are “workers”. Veezu, one of the largest UK operators, disagrees fundamentally, and uses very careful wording at all times to stress that its “driver partners” are self-employed.

A Veezu spokesperson said: “We use specific terms as driver partners are independent businesses in their own right – they are not Veezu employees, nor our workers. The driver partners are all licenced by the local authority, and they don’t belong to us.”

“The Passengers are not Veezu’s customer; technically, they are the customer of the driver partner.” Veezu even describes the process of taking on “driver partners” as “driver attraction”, because “driver partners are not recruited as they are self-employed. They partner with Veezu.”

This is all specifically aimed at distancing Veezu from any national ruling that might stems from the Uber/Sefton ruling. It would presumably require an actioin by a union against Veezu to challenge Veezu’s own assertion that its drivers are “partners” , not workers or employees. And it may take several rulings as Veezu operates in multiple locations, and as we know, local authorities have different interpretations of the rules.

Ultimately, the Sefton ruling will really only define what happens in Sefton. It will require further cases, further challenges elsewhere (probably from more militant unions such as the App Drivers and Couriers Union) in connection with attempts to define drivers as “workers” across the UK.

It also brings into focus the need to implement proper local standards within the industry, which would allow definitions of driver status and VAT liability to be made at a national level, once and for all, rather than via countless local rulings that may or may not apply elsewhere.

The industry needs to consider this: On one hand, many complain that fares are too low. On the other, there is fear that a 20% VAT imposition would make fares too expensive. Profitability is problematic – maybe, rather than a threat, the forced price hike may be an opportunity to press the big reset button.