Your chance to help fight off the threat of the VAT ‘taxi tax’ on private hire journeys

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The Government has launched its promised consultation over whether or not VAT should be applied to private hire journeys. The consultation, which opened on April 18, 2024, will run for 16 weeks, ending on August 8, 2024.

It comes in the wake of two court judgments that have brought the question to the fore: a December 2021 London High Court judgment on the PHV sector and its passengers, and the July 2023 Uber Britannia Ltd v Sefton Borough Council High Court judgment.

The Sefton ruling made it clear that the passenger’s contract was with the Operator, not a self-employed driver working for the operator. However, in making the ruling, the judge expressly distanced it from the question of whether or not VAT should be levied.

Commenting after the Sefton ruling, Eazitax’s Gary Jacobs said: “The judge’s ruling explicitly stated that the VAT consequences of changing the operating model were irrelevant to the case,” he said. “This meant that the court’s decision did not hinge on potential changes to the VAT obligations of ride-sharing platforms.”

It was argued that as most individual drivers have an annual turnover well below the VAT threshold (£90,000 as of April 1, 2024), journeys would not be liable to VAT if the contract was with the individual driver.

“It is mandatory for those operating above this threshold to register for VAT and to charge 20% VAT on the PHV services that they provide,” the consultation document states. This means that, in practice, most operators’ turnover is well in excess of the VAT threshold, and if the contract is with the operator, the journey should be subject to VAT.

However, other forms of transport, such as hackney carriages, buses and trains, do not charge VAT for travel – so opponents of VAT charges believe the same rule should apply to private hire.

This is the question that the consultation seeks to answer. The stakes are high: if drivers were allowed to contract with passengers as principal on all their work, without the operator playing a role, the government believes around £750 million per annum in VAT would not be paid to the Exchequer.

Subjecting PHV services to a reduced rate of VAT (5%) would be expected to cost the Exchequer around £1 billion per year, while zero rating PHV services would be expected to cost the Exchequer around £1.5bn per year. This actually represents a significant percentage – almost 1% – of the total VAT revenue collected in 2024/25, which is forecast to reach £176bn. HMRC is not going to give up this income without a fight.

It should be noted that HMRC is not currently receiving anything like this amount, as current rules, certainly prior to the Sefton ruling, mean most private hire operators have interpreted the relationship between driver, customer and operator in such a way as to avoid VAT. Most operators claim they act as an “agency” for self-employed drivers, acting as a platform that provides work in return for a cut – and under that model the contract is between driver and customer, and as the drivers are in general not VAT-registered, VAT is avoided.

The wording of the consultation document appears to have a degree of sympathy toward the trade, stating: “This consultation also invites views on potential government interventions that could help to mitigate any undue adverse effects that these judgments could have on the PHV sector and its passengers.”

“When evaluating potential interventions, the government has considered the impact on vulnerable consumers, the fiscal impact it would have on the Exchequer, and the degree to which it would promote fair competition between PHV operators.”

In the absence of any firm ruling on VAT, operators have taken a variety of approaches. Some, notably Addison Lee, have simply charged VAT at the full 20% on all journeys. Addison Lee argues that the overwhelming bulk of its client base are business customers, and thus are likely to be VAT registered. So any VAT charged on fares would simply be reclaimed through the company’s own VAT return.

The government acknowledges that this “account work” is liable for VAT and states in the document that it is outside the scope of the consultation – so it appears that VAT will still be charged at 20% on some fares. 

Other operators, notably ride-hailing operators such as Uber and FreeNow, have used the Tour Operators’ Margin Scheme (TOMS) to reduce the VAT charged to just the operator’s cut of the fare. So if a driver took a £100 fare via one of these platforms, VAT would only be payable on the commission paid to the platform – say 20%. So HMRC would receive 20% of £20 – £4 – rather than £40 if VAT was charged at 20% on the whole fare.

Furthermore, if VAT was chargeable on all fares, the operator would have no choice but to raise fares – which would hit vulnerable customers the hardest.

Another recent court case appeared to back use of the TOMS as perfectly reasonable. In December 2023, ride-hailing operator Bolt won its appeal against HMRC over whether private hire operators are eligible to use the TOMS.

Ruling in favour of Bolt, Tax Tribunal Judge Greg Sinfield KC said: “I have decided that the mobile ride-hailing services supplied by Bolt are services of a kind, namely passenger transport, commonly provided by tour operators or travel agents and the supply of such services falls within the scope of the TOMS.” The dispute concerned the amount of VAT due on the supplies of ride-hailing services made by Bolt as ‘principal’.

Judge Sinfield said: “There is no dispute that supplies of ride-hailing services are chargeable to VAT at the standard rate.”He ruled that Bolt should not account for VAT on the total amount paid by the customer. Instead it should charge VAT only on the margin (the difference between the amount paid by the customer and the cost to Bolt of goods or services supplied by taxable persons and used directly to provide the service).

However, the government is directly at odds with this ruling, and this could prove pivotal to the final decision. In the consultation document, the government states its position: “It is important to note that the government’s position continues to be that TOMS does not apply to the PHV sector.

As such, HMRC will challenge PHVOs that account for VAT under TOMS, which was not designed to be used by this sector.” Conflict between the government’s position and Judge Sinfield’s opinion could be crucial in making a final decision. 

The government confirmed that under current legislation, private hire fares are subject to VAT, providing the provider is VAT registered. The document states: “PHV services provided by VAT-registered businesses are, and always have been, subject to the standard rate of VAT (20%). Taxis are also subject to standard-rate VAT.

This differs from transport designed to carry at least 10 passengers (such as buses and trains), which is subject to VAT at the zero rate. This zero rate is intended to incentivise the use of higher-volume transport services, thereby helping to reduce congestion and vehicle emissions.”

The consultation outlines a number of possible courses of action, most of which are complicated and have knock-on effects, made worse by the effects of the recent court rulings.

Solutions include changes to the VAT regime – including the optimum solution of zero-rating PHV fares in line with bus and train fares, or charging a reduced 5% rate that would have a minimal material effect on fares, and would obviate the need for the use of the TOMS scheme.

Other changes to the legal status of operators and drivers also carry complications. For example, the government suggests that the operator could act as “principal” in terms of the contract with the customer, but could continue to act as “driver’s agent” for the purposes of VAT. This is a solution that could end up in a lengthy court case. “VAT is litigious,” the government admits.

The consultation also suggests a similar scheme to TOMS could be introduced specifically for the private hire sector.

This could provide a “magic bullet” compromise solution, though HMRC would still have to swallow a substantial loss or VAT revenue.

The document states:“The government could introduce a new margin scheme specifically for the PHV sector that would allow PHVOs to account for VAT on the margin between the passenger fare and the driver’s commission fee.

This would allow TOMS to remain targeted at tour operators as intended (thereby limiting the risk of boundary pushing), while recognising the potential benefits of a margin scheme for the PHV sector as an administrative way to reduce their VAT liability on PHVO supplies.

“A margin scheme would prevent PHVOs from claiming back any input VAT they pay on the services they buy in and resupply to passengers. However, it would limit the effective rate of VAT to 4-5% of the full fare, as opposed to the standard 20% rate of VAT on the full passenger fare.”

A new margin scheme would be less complicated than TOMS, making for simpler calculations calculation, and it could be optional. Operators adopting it would have to adapt accounting processes to accommodate it.

It’s vital that the industry has its say, and makes its case powerfully and succinctly. The 37-page document is long and rambling, even going into a lengthy discussion of the 2014 Law Commission report, and whether or not a two-tier Hackney/PHV system should be maintained.

The Law Commission report pre-dates the arrival of ride-hailing, so why it is considered relevant here is something of a mystery – though it must be borne in mind that our industry is regulated by rules that are in many cases outdated. Make sure you address these points in your response. While the legal framework for the sector  does need updating, it doesn’t need piecemeal changes based on outdated data.

The nature of a consultation is to gather a breadth of views. The industry has a number of choices to make. Heading off the threat of a blanket imposition of 20% VAT is imperative, and HMRC’s protestations that it will lose billions as a result should be taken with a large pinch of salt. HMRC would gain vastly from 20% VAT, but right now, it’s managing well enough without that money.

The big decision is whether to push for a zero-rated VAT regime or whether to go down the route of a TOMS-style commission scheme that would have a far smaller impact on fares, and would give the a revenue stream to HMRC at rreduced levels. As the government has suggested this, it must be a under consideration.

The argument that buses and trains are zero-rated as they somehow are more virtuous than a PHV is clearly nonsense. PHVs have been among the cleanest part of the vehicle parc for years thanks to the use of hybrids.

And with fleets switching to electric cars, the emissions argument in favour of buses disappears. And as PHVs demonstrably take private cars off teh road, their overall impact on congestion is positive too.

Indeed, the poor standard of bus services has meant PHVs provide a public transport service. How else does the elderly pensioner visit a sick relative in hospital, or the struggling parent without a car carry out a weekly supermarket shop for a large family? Adding VAT to fares would hit these most vulnerable members of society the hardest. 

The consultation can be found here:

https://www.gov.uk/government/consultations/consultation-on-the-vat-treatment-of-private-hire-vehicles

Responses to the consultation should be sent by August 8, 2024 via post to: HM Treasury, VAT & Excise Team, 1 Horse Guard’s Rd, London, SW1A 2HQ or via email to:

phvovatconsultation@hmrc.gov.uk

The government will publish a formal response to this consultation in due course.