While the pre-election tax administration and maintenance (TAM) day has been described as a damp squib by many, it did include the announcement of a consultation on the VAT treatment of private-hire vehicles (PHVs).
This consultation comes after a number of high-profile cases involving ride-hailing apps such as Uber and Bolt.
The consultation is running for 16 weeks, from 18 April to 8 August 2024. It seeks the views of drivers, passengers, businesses, trade associations and anyone else with an interest in the topic.
Once the consultation period is over, responses will be used to inform the government’s response to the court judgments.
PHV vs taxi
Taxis (known as hackney carriages in older legislation) can be flagged down, and are not impacted by these rules.
PHVs however must be booked through a licenced operator, and it is those that are the subject of the consultation.
According to the consultation document, there were 289,400 licenced taxis and PHVs in England in 2023. In Wales, the figure is 9,753.
A 2022 national travel survey in England found that 64% of people used a taxi or PHV twice a year at most. Around 16% of people used them at least once a month. For 7%, it was at least weekly.
Half of the trips taken were for leisure purposes, with the rest being commuting, personal business, shopping and education.
Standard-rated journey
There has never been any doubt that the service of transporting a passenger in a taxi or PHV is standard rated and so subject to VAT at 20%.
The VAT registration threshold of £90,000 (previously £85,000) means that self-employed private-hire drivers are often unregistered, whereas private-hire operators, who deal with a number of vehicles and drivers, usually are VAT registered.
Private-hire operators who act as agent only will charge VAT on their commission to the driver, but their self-employed, unregistered driver will not charge VAT on their fare to the passenger.
Principal actors
Private-hire operators who act as principal will charge VAT on the fare to the passenger.
In the Uber court case (which was not VAT related) it was found that, to comply with licensing laws, the operator would have to accept a contractual obligation to the passenger to act as principal.
If that is the case, then the operators would always be acting as principal, and would have to charge VAT on the full customer fare.
Since 2022, all operators in London have had to follow this model and so have been acting as principal. While it was only a Transport for London directive, some operators have applied the same logic on nationwide bookings.
Price rises
The consultation starts with some background questions about the responder.
The next section looks at the impact of the court judgments, and operators being treated as principal. The assertion is that it could result in an increase of 1.25–2.5% in fares across the whole market.
For the average passenger, this would equate to an increase in fares of £2.70–£5.60 per year.
There could also potentially be a reduction in journeys as a result of price rises.
The difficulty, of course, is that a lot of vulnerable people rely on private-hire services to get about.
Change the legislation
The government could amend the transport legislation or the VAT legislation so that VAT was no longer due at the standard rate on all private-hire fares. It has been estimated that this would cost the Exchequer around £750m per year. There are other suggestions as to tweaks that could be made to the law, and views are sought on them.
Provide relief or support
If the law is left so that all operators act as principal, the government could seek to mitigate the impact of these VAT charges, particularly on people who rely on private-hire services.
One option would be to subject private hire services to VAT at the reduced rate of 5% (cost of £1bn per year) or to zero rate it (cost of £1.5bn per year).
Another suggestion is to introduce a new margin scheme, specifically for the sector. This may be similar to the tour operators margin scheme (TOMS), but removes the uncertainties highlighted by the Bolt case. The cost of that is estimated to be £750m per year.
Alternatively, measures could be introduced that are targeted at supporting more vulnerable customers. Some suggestions are:
- zero rating of demand-responsive transport (DRT) for people in rural areas
- widen the scope of the existing disabled-persons bus pass
- paying grants to bus service operators to subsidise community transport options
- provide additional funding for community transport provision such as dial-a-ride, shopmobility.
There are some interesting themes and topics to look at there and I would advise anyone in the industry to contribute to the consultation so their thoughts are heard.
