Some news outlets seem to think that there is a new form of 'taxi-tax'. There is no new tax but a dispute about VAT. We take a closer look at the issues.
The arrival of the 'ride hailing' app has been a sizeable dirupter in taxi and mini-cab business models. US company Uber and Estonian based Bolt have both have both been heavily involved in litigation with HMRC with regard to their VAT status.
Uber had also taken an employment status appeal to the Supreme Court, which confirmed that Uber's drivers are workers and not self-employed.
What is the tax problem with taxis?
It all boils down to whether taxi fares subject to VAT.
Fares charged to passengers for taxi or private hire journeys are subject to VAT at the standard rate, where the person making the supply is VAT registered.
- The exception to this is where the vehicle is designed or adapted to carry at least 10 passengers. In this case, zero-rating applies.
- Tips and gratuities voluntarily given by passengers are outside the scope of VAT.
The way in which many taxi-cab Private Hire Operator (PHO) businesses are structured means that, where the cabbie is self-employed and not registered as an individual for VAT, the fares charged for taxi or private hire journeys often do not include VAT.
A recent High Court case has cast some doubt on this previously accepted VAT treatment.
Do all self-employed PHOs have to register for, and charge, VAT?
A taxable person only has to Register and account for VAT on the taxable supplies they make when their taxable turnover breaches the VAT registration threshold. Currently, this threshold is £85,000.
- If a self employed person who is a PHO is not required to register for VAT, due to their taxable turnover being below £85,000, they should not be charging VAT on their fares.
PHOs and the VAT agency rules
Many PHOs do not work alone, and some are in business engaging other drivers. Those drivers may be employed by the PHO, or self-employed, depending on the specific terms of each engagement.
Where the drivers are employees of the PHO, the PHO will be acting as a Principal for VAT purposes.
The PHO may also be acting as principal where the drivers are self-employed; this will depend on contract terms and working practices.
- When a VAT-registered PHO acts as principal it must account for VAT on the full amount of fares paid by customers.
This is relatively straightforward, although it can come with a high VAT burden.
What about when the PHO is acting as agent?
Where a PHO's drivers are self-employed, the PHO may be acting as their Agent for VAT purposes. This will depend on the terms of any written or oral contract with the drivers, and the actual working practices of the business.
In a typical agency arrangement:
- The PHO will relay bookings to the drivers, often on a rota basis, for an agreed fee.
- Where drivers accept a booking, they agree a fare with the passenger and collect that fare.
- The drivers are entitled to the full fares paid by the customers and are responsible for accounting for taxes on the fare.
VAT-registered PHOs that are acting as agents only account for VAT on the fees they charge the self-employed drivers, not on the fare that the driver charges and collects from the passenger.
- The self-employed drivers are the party making supplies of transport and must account for VAT on their fares, if they are registered.
- Often, as noted, each driver’s turnover is below the registration threshold meaning that they are not required to register for VAT and have no obligation to charge or account for VAT.
The effect of this agency relationship is that, often, no VAT is due on fares.
So, where’s the problem?
In July 2023, the High Court’s decision in Uber Britannia Limited v Sefton Metropolitan Borough Council [2023] EWHC 1975 was published.
While this case did not relate to VAT, it may have VAT implications.
- The High Court found that, in order to operate lawfully, where a licensed operator outside of London accepts a booking from a passenger, they are required to enter as principal into a contractual obligation with the passenger to provide the journey which is the subject of the booking.
- This decision followed the High Court’s ruling in 2021 that Uber acted as principal in respect of its operations in London. Uber took this case against Sefton Metropolitan Borough Council to seek to ensure that the previous decision of the High Court would apply to all private hire firms in the UK.
This has created a fundamental contradiction: PHOs must be a principal for licensing purposes, but often account for VAT only on the fees they charge drivers as though they are acting as agents.
Does the Bolt case provide a solution?
In December 2023, the First Tier Tribunal (FTT) published its decision in Bolt Services UK Limited v HMRC [2023] TC09014.
- Bolt Services UK Limited (Bolt) provides mobile ride-hailing services on-demand whereby private hire passenger transport services could be ordered and paid for through a smartphone application.
- Bolt had applied to HMRC for a non-statutory ruling that the Tour Operators Margin Scheme (TOMS) applied to its ride-hailing services supplied as principal. HMRC issued a decision notice stating that TOMS did not apply.
- Bolt appealed to the FTT, which found that the mobile ride-hailing services supplied by Bolt were services of a kind, namely passenger transport, commonly provided by tour operators or travel agents. As such, the supply of such services by Bolt fell within the scope of the TOMS.
The result of this decision is that, under TOMS, Bolt was only liable to account for VAT on its margin, rather than the full passenger fare.
This is essentially the same position that Bolt would have been in had it been acting as agent and provides a possible solution to the additional VAT burden that would otherwise arise when acting as principal.
It will also save Uber, which could otherwise be described as a principle for VAT purposes from having to charge VAT on its fares.
What will happen next?
Although Bolt won its case before the FTT, this decision does not set a binding precedent.
- In January 2024, HMRC appealed the Bolt decision to the Upper Tribunal, the hearing date for which has yet to be set.
- Only when that litigation has concluded will we have a definitive answer as to whether PHOs can fall within TOMS.
HMRC are clearly alert to the uncertainty surrounding PHOs and agency caused by the Uber Britannia Limited High Court decision. In response, the government Announced at the 2023 Autumn Statement its intention, in respect of VAT, to “consult in early 2024 on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC”.
It is, therefore, a case of ‘watch this space’. We expect the consultation to be published at Budget 2024.
Useful guides on this topic
Agents and principals
What is an agent for VAT purposes? What is a principal? When do the agency rules apply?
Conditionality: Taxi, private hire vehicles and scrap licenses
What is tax conditionality? Does this affect tax registration? The renewal of certain licences, to drive taxis and private hire vehicles or deal in scrap metal, is conditional on applicants confirming that they are appropriately registered for tax.
