top of page
CMTbannerV2.gif

COURT RULING: What the Uber versus Sefton court ruling means for industry models and VAT in England

Updated: Jul 31, 2023



Uber and App Drivers & Couriers Union (ADCU) successfully defeated Sefton Council and a handful of regional operators in a landmark ruling that will change the landscape of the private hire vehicle (PHV) sector.


Sefton Council, who took a neutral stance throughout the court case, and regional minicab operators sought to challenge a declaration that the contract for minicab transport should be between operators and the passenger and not between drivers and passengers.

In 2021, the ADCU defeated Uber in a similar action in the High Court under separate legislation covering only London. As a result, Uber has been forced to change its business model contract directly with passengers rather than misclassifying itself as an agent. This has helped confirm driver status as workers with statutory protections. And since Uber becomes the principal rather than the agent, it is now liable for VAT.

By incorrectly designating their drivers as principal for the last decade, no VAT has been paid on Uber services since drivers do not earn enough to meet the VAT threshold of £85,000. This changed on 31 October 2022 when Uber announced that it had reached a settlement with HMRC for back VAT payment of £615 million in unpaid tax.


In order to level the competitive playing field nationally, Uber sought a declaration at the High Court to the one imposed on it for London to cover the rest of England and Wales. This was opposed by the Veezu Group, Delta Merseyside and a coalition of operators they claim to represent.


Large app-based operators such as Uber, Bolt and FreeNow have already made these business model changes across England and Wales, as well as London. This judgment ensures that all other operators must now follow the same regulations.

Some PHV firms outside of London are concerned that they could now be forced to raise their prices by up to a fifth as the ruling will likely mean paying VAT on journeys. Ride-hailing firms will be hoping that the VAT owed will not amount to 20%, with a more ‘marginal’ rate of tax applied.


The ADCU intervened in the action to provide a worker’s voice. Sefton Council is the named Defendant for the purposes of this declaration and is claiming to be neutral before the court.


Mrs Justice Justice Foster DBE agreed that the current model of practice upheld by Councils for 47 years must now change. Private hire operators must now accept the contractual responsibility for the transport of their passengers and pay taxes due.


The ruling


In her ruling Mrs. Justice Foster DBE provided the following legal analysis on the case officially listed as Uber Britannia Limited v Sefton Metropolitan Borough Council & ORS:


On worker rights:

There is considerable strength in the view that a properly regulated and remunerated pool of drivers is a benefit to public safety.


It is clear also from The Maxwell Stamp Report that the agency driver model was deprecated by the Committee. ADCU advanced a series of compelling arguments to the effect that drivers’ working conditions may well improve as a result since they would at least in some circumstances, be recognised as workers with working time, sick pay and minimum wage rights.


ADCU did not accept that since the old style agency model was the backdrop to the 1976 Act, it determined its interpretation: they point to the fact that Maxwell Stuart suggested reform. I agree.


On public safety:

I am not persuaded that the issue of public safety is a weak purpose and of little use for the construing of the 1976 Act. Veezu and Delta suggested the licensing mechanism and the requirement for insurance were adequate protections, and there was no drive to construe the provisions as UBL argued.


Such measures in my view are, as noted by ADCU, ex post facto remedies and are no substitute: one may not insure against criminal acts.

Furthermore such provision does nothing to raise standards; it is not precautionary.


Thus, without such a direct responsibility placed upon operators, there is less likelihood that drivers will be trained or their performance managed: it conduces to better standards and public safety which serves the purpose of the 1976, as the 1998 Act. These were the submissions of ADCU; I agree.


On Uber's bid to restrict the declaration:

There is no reason on the wording to limit this to the first sub-contractual situation only, as suggested by UBL: the contract of hire should always be with the operator who has interacted with the hirer/passenger, since he can control the booking, the driver under the Act is, as submitted by ADCU, subordinate to the operator, working (unlike the hackney cab who plies for hire), entirely through the operator.


On rejection of Sefton, Veezu and Delta's argument that VAT and worker rights liability would damage the trade:

The VAT consequences for those who will wish to change their operating model are in my judgement irrelevant.


They do not condition the reading of the provisions, it could never be said that a change in the taxation position is an absurd consequence the draughtsman could never have contemplated would result and did not intend.

It, together with certain postulated economic consequences do not have relevance to the exercise of statutory construction before the Court.


Nor indeed, as was canvassed in argument, is it wholly impossible that any consequent change by way of increase to fares because of an element of taxation would necessarily be passed on to the customer.


What are the industry saying?


James Farrar, ADCU General Secretary, said: “This case has arisen because, despite the clear meaning of the letter and spirit of the law, not a single licensing authority in England has enforced these regulations in the 47 years of the history of this legislation. These regulations are necessary for the safety of the travelling public, to prevent exploitation of workers and to curb tax evasion. It should not be the responsibility of unions to ensure the industry is regulated properly but we will continue to do whatever it takes to clean up the industry and make it fit for workers and the travelling public. We will now redouble our efforts to hold local councils to account for their negligence and to challenge exploitative minicab operators that have blighted the industry for decades. The ADCU is committed to cleaning up the minicab trade for once and for all.”


Azeem Hanif, ADCU East Midlands Chair, said: “This has been a terrible, 47 year long miscarriage of justice. The purpose of the legislation is to protect workers and passengers yet local councils and operators subverted the law with tragic consequences. Part of the problem is a corrupt culture of cronyism between regional operators, council licensing committee and licensing authority staff to the exclusion of licensed drivers. Starting from Monday I will be asking tough questions of the councils in my region - including Nottingham City Council, Leicester City Council and Northampton City council - as to why this was allowed to happen. Driver licensees and the travelling public deserve a full independent inquiry into what I can only describe as a public scandal.”


An Uber spokesperson said: “Today’s judgment resolves a major inconsistency in the way that rules have been applied for private hire operators across England and Wales. But whilst it clarifies many key points, there remain questions on VAT and what passengers should pay.”

Layla Barke-Jones, a Partner in the Dispute Resolution team at the law firm Aaron & Partners, acting on behalf of a group of Liverpool-based taxi firms, including Delta Taxis, said: “Without a doubt, the case has the potential to cause significantly increased costs that will hit passengers everywhere at the time of a cost of living crisis.


“Delta had hoped to protect passengers from such an impact, and will now call on Government to make private hire taxi journeys zero rated for tax purposes, in line with other forms of transport like buses and trains, to prevent this impact on some of the most vulnerable in society for whom private hire taxis can be the only form of transport available to them.”


How much VAT will likely be paid moving forwards?

Moving to a merchant model does require operators to change their business processes and contractual arrangements, and as a result, impacts the way that VAT is charged.


One of the questions raised by these rulings is, which is the appropriate VAT regime for the whole Private Hire industry? Crucially it is likely that private hire operators will qualify to apply VAT on their margin from each trip rather than on the full fare. The latter would have significant implications for the entire industry and its passengers.


Uber would claim they have been following HMRC’s own guidance (VAT Order 1987) to apply VAT on the margin of a trip. Other operators including Bolt and FreeNow have been doing the same, as stated on their invoices.


The result of this court case has already pushed the private hire industry to call for zero-rated VAT like other forms of passenger transport such as coaches, trains, and buses. Black cab drivers turning over less than £85,000 per financial year are also not liable to pay VAT.

On the topic of VAT, Ms Barke-Jones added: “It is important to remember that this case was not about Delta’s tax liability but the potential for HMRC to require Delta to collect vat for HMRC.


“VAT is charged to the passengers and passed to the government. Delta’s stance in this case has been to try to protect the passengers. Given the potential for such large fare increases this now requires urgent government action to prevent VAT from being charged on private hire fares.”

Comments


Subscribe to our newsletter. Receive all the latest news

Thanks for subscribing!

thumbnail_phonto (1).jpg
bottom of page