TAXI TAX: VAT reform triggers prolonged Commons clash over rural taxi access, SEND costs and revenue risks
- Perry Richardson
- 9 minutes ago
- 5 min read
The recent overhaul of VAT treatment for taxi and private hire vehicle journeys prompted an extended and at times tense debate in a Commons Public Bill Committee on 29 January, as MPs from across the opposition parties warned that the measure risks higher fares, increased pressure on council budgets and unintended consequences for rural communities and vulnerable passengers.
The dispute focused on Clause 79 of the Finance (No. 2) Bill, which removes taxi and private hire vehicle transport from the Tour Operators’ Margin Scheme. Under the scheme, VAT is currently charged only on an operator’s margin rather than the full fare. The Government argues that some large private hire operators have used the arrangement to significantly reduce their effective VAT rate and that the change will ensure consistency and protect tax revenues.
Opening the debate, Shadow Exchequer Secretary James Wild moved Amendment 42, which would exempt taxi and private hire journeys in rural areas from the new VAT treatment. Wild said Clause 79 was already being described within the industry as “the taxi tax” and warned that it would expand the scope of VAT in a way that directly affected passengers.
“Currently, under the tour operators’ margin scheme, VAT is charged only on the operator’s margin,” he told the committee. “The clause will remove taxi and private hire vehicle transport from the scope of the tour operators’ margin scheme.” He said the change followed a tribunal defeat for HM Revenue and Customs on whether ride hailing services qualified for the scheme, with an appeal still pending.
Opposition MPs accuse government of imposing a “taxi tax” as ministers insist Finance (No. 2) Bill change will close loopholes and raise £700m a year
“Drivers and businesses now have to charge VAT at 20% on the fare paid by the customer – taking, for example, a £20 fare to £24,” Wild said, noting that the measure had already taken effect from 2 January. While the Labour government had not increased the VAT rate, he argued it had “certainly expanded the scope of its application”.
Treasury figures, he said, showed the change would raise about £190 million in 2025-26, rising to around £675 million a year by 2031. “That strikes me as a significant new burden – a significant new tax – on private hire and taxis,” Wild said, adding that passengers would ultimately bear the cost.
A central theme of the debate was the impact on rural areas, where taxis and private hire vehicles often substitute for limited or non-existent public transport. Wild said industry bodies were warning of double digit fare increases in some locations, with elderly and disabled passengers, women travelling at night and workers on early shifts among those most exposed.
Those concerns were echoed by Conservative backbencher Blake Stephenson, who represents a largely rural constituency. Stephenson told the committee that many villages were poorly connected to nearby towns and relied on taxis for essential journeys. He also highlighted the use of taxis to transport children with special educational needs and disabilities.
“Does my hon. Friend agree that the increase in fares, which will be passed on to our vulnerable constituents, is unacceptable,” Stephenson asked, “and that a charge will be passed on to local authorities, which is not fair to our local taxpayers?”
Wild said rural councils already spent tens of millions of pounds each year on taxi transport for SEND pupils. Citing Norfolk as an example, he said annual spending was in the region of £30 million to £40 million. “That is a huge proportion of the money that is spent on special educational needs,” he said, warning that a VAT increase could add to pressures on councils already struggling with funding.
Beyond fare increases, Wild argued that Clause 79 would create new administrative burdens for operators, forcing small businesses to account for VAT under more complex rules. He said that uncertainty made it harder for firms to plan or invest, quoting one private hire operator who said: “A 20% VAT hike would hit the elderly, disabled and rural passengers hardest. Businesses cannot plan, invest or grow while uncertainty remains.”
The opposition also raised concerns about how the policy would interact with changing business models in the private hire sector. Wild said some large operators, including Uber, were reclassifying themselves as technology platforms rather than transport providers in parts of the country. That shift, he argued, could move VAT liability from companies to individual drivers, many of whom earn below the VAT registration threshold.
The Liberal Democrats pressed the same point. Joshua Reynolds cited media reports suggesting that Uber had altered its contracts outside London so that it acted as an agent rather than the supplier. As a result, he said, many fares outside the capital could avoid VAT entirely, while passengers in London faced higher prices because Transport for London did not permit the agency model.
“Why are we now in a position where we have an absurd two-tier system in which identical journeys are taxed differently depending on whether they take place inside or outside London?” Reynolds asked, questioning whether the Treasury had accepted that the policy risked failing to deliver its projected revenue.
SEND transport costs were raised again by Liberal Democrat MP martin Wrigley, who said Devon spent around £50 million a year on taxis for children requiring specialist education. “A 20% tax on that would equate to £10 million,” he said, asking whether councils would be reimbursed to avoid cuts elsewhere.
Responding for the Government, Exchequer Secretary Dan Tomlinson said the change was designed to ensure that certain private hire operators were taxed on the same basis as others. He declined to comment on the affairs of individual companies but said HMRC would independently determine whether operators were acting as agents or principals and apply VAT accordingly.
Tomlinson said the Government was confident the exclusion from the margin scheme was “carefully targeted” and would not have unintended consequences for legitimate tour operators. He argued that the reform would end exploitation of an administrative scheme intended for tour operators, which in some cases reduced effective VAT rates to around 4%.
“The OBR certified our costings for the Budget, and this measure is expected to raise £700 million of tax revenue in each year,” he said. “That is vital to the public finances.”
On SEND transport, Tomlinson said most taxi services were not using the margin scheme and would therefore be unaffected. He added that local authorities had long-standing mechanisms for handling VAT liabilities, including reclaiming VAT where permissible, and resisted calls for a specific compensation guarantee.
Wild returned to press concerns about day trip and excursion operators, arguing that the drafting of Clause 79 could force tour firms to unbundle packages, increasing complexity and costs. He also said the Government had failed to address rural impacts adequately and warned that higher transport costs would add to cost-of-living pressures.
Saying he was not satisfied with the minister’s assurances, Wild confirmed he would press Amendment 42 to a vote. The committee subsequently voted on the proposal as scrutiny of the Finance (No. 2) Bill continued, with the broader VAT reform set to remain a contentious issue for the taxi and private hire sector as the legislation progresses through Parliament.
