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PHV VAT CONSULTATION: What’s been proposed and how could it impact the taxi trade?


Image credit: DALL.E (AI generated)

The Government has recently published a comprehensive consultation document through HM Treasury and the Department for Transport that addresses new VAT considerations for the private hire vehicle (PHV) industry, following pivotal High Court decisions.


What’s it all about?


The legal outcomes mentioned above have prompted a re-evaluation of how VAT obligations are applied within the sector, potentially reshaping financial and operational frameworks for PHV businesses.

Previously, PHV operators managed VAT payments as agents, but court rulings in 2021 and 2023 have mandated a shift to treating them as principals. This shift is designed to simplify tax procedures and enhance fair play across the transport industry. The consultation now underway aims to examine whether PHV operators can retain their agent status for VAT while still functioning as principals in terms of service delivery, a move that could significantly mitigate VAT costs for these operators and thus prevent price increases for end-users.


Potential impact


One of the big concerns for any hackney carriage driver is the threat, however unlikely, that this could see a ‘zero-rated’ VAT status introduced for just the PHV sector. If introduced the Government would have to encourage PHV drivers, who are not currently registered for VAT, to do so voluntarily. This strategy could allow minicab drivers to reclaim VAT on substantial outlays such as vehicle purchases and fuel, which could lead to reduced operational costs and, consequently, lower charges for passengers. Essentially, you could have a minicab driver claiming VAT back on a Prius and its annual fuel, but a black cab, wheelchair accessible taxi would still require tens of thousands in VAT.


This is just one of a number of concerns around scenarios that are very much hypothetical now. The Government has made it clear that they do not favour some of the more radical options discussed such as scrapping the two tier system of regulation for taxi and PHV, but they are still being discussed as options and championed by some operators.

Industry reaction


Key figures in the taxi industry have been keen to highlight any changes that could tilt the competitive balance in favour of PHV operators by enabling them to offer lower fares due to diminished VAT duties. Additionally, the possibility of PHV drivers being able to offset major costs against VAT, as just discussed, could lead to an uneven playing field, disadvantaging traditional taxi drivers the majority of whom are not registered for VAT.


The LTDA’s Steve McNamara has already voiced strong intentions to respond to the consultation, stressing the importance of maintaining the current regulatory framework that distinguishes between taxis and PHVs. McNamara asserted: “We will be responding strongly to the consultation to emphasise the ongoing importance of the two-tier system of taxi and PHV regulation, which guarantees passenger choice and public safety and must not be undermined in any way. We will also be seeking reassurance that any changes made to the VAT treatment of private hire vehicles do not

put licensed taxi drivers at a competitive disadvantage.”


In parallel, Mariusz Zabrocki, General Manager of FREENOW UK, highlighted the importance of maintaining investment and competition within the transport sector amidst these changes. Interestingly, he also opposed any proposals that would eliminate VAT for PHVs completely, arguing for the necessity of a level playing field. Zabrocki said: “FREENOW is glad to see the Government launching this consultation. The current uncertain VAT status has already led to a sharp reduction of investment and competition in the sector, which is not ideal considering the current socio- economic landscape and the fact that so many people rely on this industry to make ends meet.


“FREENOW has paid its share in taxes since its launch in the UK in 2011, and we believe all PHV operators should pay VAT, so we’re against the 0% rate for PHV as proposed by some of the operators.


“We believe that any future decisions need to ensure there is a level playing field when it comes to the whole industry, ensuring that the taxi industry is not negatively impacted by any potential changes in favour of private hire.”


What happens next?


Some of the early signs would indicate that the big hitting PHV operators are more likely to push for a marginal 5% VAT rate rather than a complete zero rate. The marginal approach allows operators to account for VAT only on the profit margin—the difference between the total fare charged to the passenger and what is paid to the driver, thus reducing the VAT payable.


However, research within the consultation papers suggests an adjustment to a 5% VAT rate would represent a projected cost the HM Treasury in lost revenue of approximately £1 billion annually, which may make the Government think twice.


A zero-rating scenario would have an even more profound impact, potentially reducing the Exchequer's intake by an eyewatering £1.5 billion each year. Can the Government afford to wipe that type of revenue off?


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