TAX THRESHOLD: Why Flat Rate VAT for some self-employed taxi drivers might be an option

VAT can be one of the trickier areas for self-employed taxi drivers to navigate if they are earning near the threshold. Many drivers operate as sole traders, meaning they must manage their own tax affairs while keeping costs and paperwork as low as possible. One option available for cabbies approching the £90,000 VAT threshold is the Flat Rate VAT Scheme.

What is Flat Rate VAT?

The Flat Rate VAT Scheme is seen as a simplified way of paying VAT to HM Revenue and Customs (HMRC). Instead of working out the VAT charged on every job and then deducting the VAT paid on expenses, drivers simply apply a fixed percentage to their gross takings and pay that amount to HMRC.

For passenger transport services, which includes self-employed taxi drivers, the flat rate percentage is set at 10%. So, for every £1,000 a driver earns including VAT, they would hand over £100 to HMRC under the scheme.

Eligibility for taxi drivers

To use the scheme, annual VAT-taxable turnover must not exceed £150,000, excluding VAT. If turnover later rises above £230,000 including VAT, the driver must leave the scheme. Many single-vehicle taxi operators fall within these limits and can therefore use the scheme if they wish.

Why taxi drivers sometimes use the scheme

Unlike many other businesses, taxi drivers cannot add VAT to their fares. Fares are set by local licensing authorities, and passengers are not issued VAT invoices. This means that even if a driver is VAT-registered, they cannot recover VAT directly from their customers in the fare price.

This creates a challenge. A driver on the standard VAT scheme would still have to account for VAT out of their fixed fare income, which can reduce earnings significantly. The flat rate option softens this by making the calculation simpler and, for many drivers with low VAT-able expenses, potentially less costly.

Limits on reclaiming VAT

One of the main trade-offs is that drivers using the flat rate cannot normally reclaim VAT on everyday expenses such as fuel, servicing, tyres, or insurance add-ons. The only exception is for certain capital items costing more than £2,000, such as a vehicle purchase.

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For a driver with modest running costs, this may not make much difference, and the lower administrative burden can outweigh the loss of reclaim. However, drivers with high VAT-able expenditure, such as those leasing newer vehicles, may find the standard VAT scheme more beneficial because they can reclaim large amounts of input VAT.

Speak to your accountant for more on this and to work out what works best in your situation.

A worked example

Take a self-employed taxi driver with £100,000 annual turnover from fares, all including VAT.

• Flat rate scheme: At 10%, the driver pays HMRC £10,000. They can also claim VAT relief on large assets like the taxi vehicle.

• Standard scheme: The driver must treat fares as VAT-inclusive. That means the £100,000 turnover contains 1/6 VAT (£16,666). They owe HMRC this full amount but can reclaim VAT on eligible expenses such as fuel and repairs. If annual expenses with VAT total £20,000, they may reclaim about £3,300, reducing the net payment to around the £13,000 mark.

Deciding what works best

The decision to use flat rate VAT depends on the driver’s turnover, expenses, and vehicle arrangements. Those with older vehicles and fewer VAT-able outgoings often prefer the scheme, while drivers with higher costs may choose the standard method. An remember, this is only for cabbies passing the revenue threshold of £90,000. For many cabbies thats an option.

HMRC’s full guidance on the Flat Rate VAT Scheme, including eligibility rules and sector rates, can be found here. Please also make sure you seek advice from your accountant to discuss Flat Rate VAT in full detail.