Inconsistencies in the VAT treatment of taxi fares are soon to be ironed out – or are they?
In his 2023 Autumn Statement, the Chancellor announced a consultation on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC on the VAT treatment of Private Hire Vehicles.
To understand what this means, and why it matters if you’re a taxi operator (or indeed, a taxi user), we need to go back to 2021, when you may remember Uber being involved in a court battle over whether its drivers were self-employed or employees of the company.
The court ruled that they weren’t quite either – but that they should be classed as ‘workers’ rather than self-employed contractors and were, therefore, entitled to a minimum wage and holiday pay.
Uber’s argument relied on the view that they were a booking agent, that used drivers as contractors. Whereas the court saw them as a supplier of taxi rides.
This is important, because what follows revolves around this principle.
Later that year, Uber lost another High Court case over how licensing regulations are applied by Transport for London. The court ruled that Uber was to be viewed as the ‘Principal in all respects’ where they provide journeys to passengers – that is, they were indeed the supplier of the complete taxi journey, and not just an agent.
This changed a lot for the company, not least its VAT position. Until that point, Uber had only been collecting VAT on the fees it charged its drivers. The supply of the journey, was made by the Uber driver to the end customer, and these drivers were often trading below the VAT registration threshold, therefore, did not need to charge VAT on the supply. However, if Uber were in fact the principal and supplying the full journey, they were trading well above the £85k VAT registration threshold and, in HMRC’s view, should have been charging VAT this whole time!
As a result, not only were Uber obliged to add 20% to its supplies from March 2022, but, under the statute of limitations, it also had to go back 4 years and account for VAT on its historic supplies. Which meant paying HMRC a large amount of backdated VAT it hadn’t collected.
At the time, a spokesman for the company stated, “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”.
Uber, therefore, went back to the High Court in the summer of 2023 (Uber Britannia Ltd v Sefton MBC) to argue the agent vs principal point further and seek to ensure that it was not alone in applying the rules. If drivers are not treated as the principal for the purposes of supplying the taxi journey, then the ride hailing company must be the principal and, therefore, should be subject to the same terms as Uber.
This time they won. Which meant that other taxi companies arguing that they were agents and not principals, would have to change the way they structured their business and, would have to start charging VAT on the cost of the entire journey.
So, Uber levelled the playing field and brought other taxi companies into the VAT system. However, although Uber paid over a large amount of historic underpaid VAT to HMRC, they didn’t pay the entire VAT liability yet. And the reason for this, was because they have another card up their sleeve!
A bolt from the blue
Enter Bolt, the Estonian cab operator and Uber’s main competitor in London, who has fought HMRC at a Tax Tribunal over exactly the same tax regulations.
Unlike Uber, Bolt didn’t argue that they were not the principal, in fact, it was the opposite. Bolt wanted to be the principal, because if it was not, it couldn’t successfully argue that it was using The Tour Operators Margin Scheme (TOMS). It needed to be the principal for the purposes of TOMS. And guess what? The courts agreed!
The Judge in this case ruled that “mobile ride-hailing services” such as Bolt can be subject to the Tour Operators Margin Scheme (TOMS) and – pointedly – should only pay VAT on their margin, rather than the entire journey cost.
And it looks like Uber had the same idea back in March 2022, which explains why, since then, it hasn’t been adding 20% VAT to the cost of its journeys. It has, instead, being applying TOMS.
HMRC is, of course, considering the implications of the Bolt decision. A spokesman said: “We are disappointed with the ruling and are carefully considering the tribunal’s decision. “Our view remains that the Tour Operators Margin Scheme (TOMS) does not apply to minicab businesses.”
So what is this likely to mean for taxi companies?
It’s the interaction of the employment law point and how that influences the VAT liability question that is the core point to grasp. If the firm is employing the driver then they are not a separate contractor and it is the firm that is making the supply of the taxi service as a principal. If that is the case, then the starting point for HMRC is that VAT is due on the full value of the supply charged for the journey by the taxi firm.
If Uber’s case is taken as a precedent, then taxi firms that have not been operating in this way may have to backdate their VAT payments for up to 4 years.
This could have a devastating effect over these taxi firms. If backdated VAT bills are imposed and taxi firms are unable to pay them, HMRC could enforce debt recovery action and push a large number of businesses into insolvency.
But then we need to consider the implications of the Bolt case as well, from the VAT accounting perspective. Is VAT to be accounted for on the full value of the taxi fare or – as under a TOMS treatment – VAT is paid out of the margin made on the supply by the taxi firm. You can appreciate why HMRC is less keen on the successful use of the TOMS interpretation in this regard.
If the new Bolt ruling is unchallenged by HMRC, we would expect to see more of these taxi firms begin to use TOMS as the means for working out the value on which VAT is accounted for on the income.
It is, therefore, highly likely that HMRC will appeal the Bolt case, which will keep our courts busy for the foreseeable future. Businesses operating in this area will still need to determine how they account for the VAT due on these supplies – business doesn’t stop after all.
If you need any help interpreting your own VAT position, your Xeinadin advisors have long experience of the ups and downs of VAT regulation, and little surprises them. So why not set up a confidential chat by completing the contact form below?
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