The 20% VAT conundrum

Will the private hire trade have to charge VAT on fares? Or will a recent ruling that the TOMS scheme is acceptable kill off the idea? Mark Bursa reports

THIS QUESTION OF VAT ON PRIVATE HIRE FARES HAS become something of an issue following last year’s Uber vs Sefton court ruling.

This question of VAT on private hire fares has become something of an issue following last year’s Uber vs Sefton court ruling.

This prompted Chancellor Jeremy Hunt to launch a consultation into whether private hire operators should charge VAT on fares. He announced the move in last year’s Autumn Statement, saying: “The government will consult in early 2024 on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC.” By the last week of February, however, no consultation had yet been published.

Subsequently, there have been various attention-seeking “campaigns” against VAT. Most recently, right-wing Conservative MP Jonathan Gullis announced he had written an open letter to Chancellor Hunt, urging him not to consider adding 20% VAT to private hire fares, claiming such a move was opposed by 70% of the population.

Gullis is an unlikely champion of the downtrodden. He was sacked from a ministerial role in the Education Department by Prime Minister Rishi Sunak. A Liz Truss appointee, his brief ministerial career included a reprimand from the Speaker for “unministerial behaviour”.

Nevertheless, his open letter talks a good game. Gullis outlined the severe challenges faced by the economy which have left businesses across the UK striving for stability amid a cost of living crisis. Gullis emphasised that any proposed imposition of a 20% VAT on PHV journeys would disproportionately affect those least able to bear the financial burden.

He wrote: “We are writing to you to urge you to protect the taxi industry from yet another tax that will damage those who can afford it least.”

Reliance on taxi and private hire services was high among vulnerable demographics, including children, the elderly, and those with mobility issues, as well as the 16 million people who use private hire vehicles for visits to hospitality venues. Gullis argued that the impact of VAT could devastate not only the taxi industry but also the hospitality sector, which is already grappling with the aftermath of challenging years.

He urged the Chancellor to publish a promised consultation before the Spring Budget. “You have committed to a consultation which we are yet to see following the recent court ruling that HMRC will be obliged under current rules to effectively impose a 20% VAT levy on the public for private hire/taxi journeys - a significant rise from the current status quo.”

Whether Gullis’ concerns are genuine – or a populist attempt to hang on to his Stoke-on-Trent seat, with an election on the horizon – is unclear. But his claim that “HMRC will be obliged to impose 20% VAT” is by no means certain.

Far from it. The judgement in the Sefton case did not specifically relate to VAT. Rather, it simply 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.

Eazitax’s Gary Jacobs, commenting on the Sefton ruling, 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.”

Operators generally are VAT-registered, and therefore could be liable for VAT – if such a ruling were made. For the moment, there is a loophole which reduces the VAT liability to just the operator’s margin, using a loophole known as the Tour Operators’ Scheme (TOMS).

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.

And another recent court case appears 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.

The ruling will certainly make any effort by HMRC to force all private hire operators to charge full 20% VAT on fares a lot more difficult, as the judge was quite clear in his support of the scheme.

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 ridehailing 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).

So if Bolt’s margin on a fare was 15%, VAT would only be chargeable on that portion of the fare.

Judge Sinfield dismissed HMRC’s argument that Bolt had “materially altered” the service provided by its independent drivers. HMRC’s case was that tour operators and travel agents buy in services and simply pass them on to the traveller, whereas it argued that the bought-in drivers’ services are changed by the use of Bolt’s own resources and therefore they are ‘in-house’ or materially altered because they are not merely passed on. “I do not agree with this analysis,” the judge said.

“I consider that the supply of mobile ridehailing services, without any additional elements, to a traveller is a provision of travel facilities within the TOMS in the same way as a supply of accommodation only,” he concluded.

The judge also said there should be no distinction between ride-hailing services and pre-booked journeys. “Any distinction based on how far in advance a ride was booked would necessarily be arbitrary, eg a ride booked two hours in advance is within the TOMS whereas one booked one hour 59 minutes before the pick-up is not. Such a threshold cannot be determinative,” the judge said.

“It seems to me that ridehailing services and scheduled rides cannot be differentiated and are both services of a kind commonly provided by tour operators or travel agents for the same reasons. It follows that

I do not need to consider where the dividing line lies between ride-hailing services and scheduled services for the purposes of the TOMS.”

The next test for the TOMS will be in the first half of 2024, when HMRC is facing a similar appeal from Bolt’s rival Uber over the same issue. An Uber spokesperson said the company would not be commenting on the Bolt ruling as it was preparing its own litigation.

In the meantime, 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.”

When Chancellor Hunt gets round to launching his consultation, he will need to factor in both the Sefton and Bolt rulings, which would appear to carry more weight than any demand from HMRC .

A zero-rating would be the optimum result, but universal acceptance of TOMS would be a decent result, as HMRC would receive some money, but the impact on the private hire trade and its drivers and customers would not be too harsh. There is cause for cautious optimism that we won’t be stung for 20% across the board –though as we’ve seen with this government, anything could happen.