TAXI TAX: What is flat rate VAT and how does it affect the taxi industry?

If you are a taxi driver or a private hire operator, you may be wondering what is flat rate VAT and how could it benefit your business.

Flat rate VAT is a simplified scheme that allows you to pay a fixed percentage of your turnover as VAT, instead of calculating the actual amount of VAT you owe on each transaction. This can save you time and hassle, as well as reduce the risk of errors and penalties.

To join the flat rate VAT scheme, you need to meet certain criteria, such as having a turnover of less than £150,000 (excluding VAT) in a year, and not usw the cash accounting or annual accounting schemes. You also need to choose a flat rate percentage that matches your business sector. For taxi drivers and private hire operators, the flat rate percentage is 10%.

In theory this means self-employed taxi drivers that earn more than the £85,000 VAT threshold, would only pay 10% of their total turnover to HMRC as VAT rather than the standard 20%. However, cabbies cannot reclaim any input VAT on their expenses, unless they buy a capital asset worth more than £2,000 (including VAT).

For example, if your turnover in a quarter is £12,000 (including VAT), you would pay £1,200 (10% of £12,000) as flat rate VAT to HMRC. If you were a private hire vehicle (PHV) or chauffeur driver with an operator’s licence, you could charge 20% for services and keep the full £2,400 (20% of £12,000) as your profit. If you had bought a new taxi for £25,000 (including VAT) in that quarter, you could also reclaim £4,167 (1/6 of £25,000) as input VAT.

For Hackney Carriage drivers working off a meter, passing the VAT threshold is a problem as you cannot charge more than the total of the fare. Rather than the passenger paying the VAT on the service, it is the cabbie that must pay the VAT bill from the metered fare amount.

The flat rate VAT scheme can be beneficial for taxi drivers and private hire operators who have low expenses and high turnover. However, it may not suit everyone, especially if you have high expenses and low turnover. It’s always best to speak to a professional accountant who can help compare the flat rate scheme with the standard scheme to see which one is more profitable for you.

If you want to join the flat rate VAT scheme, you need to apply online or by post to HMRC. You can start using the scheme from the beginning of the next tax period after you receive confirmation from HMRC. You can also leave the scheme at any time by notifying HMRC in writing.

TaxiPoint caught up with industry tax experts Drive Thru Tax to run through some points on the topic of VAT and flat- rate tax...

COULD YOU PROVIDE A LITTLE MORE DETAIL AROUND SELF-EMPLOYED VAT THRESHOLDS FOR TAXI DRIVERS?

Self Employed Drivers are in business and have to register for VAT if they exceed the £85,000 VAT threshold from their business income. This will be the sum of fares received from customers plus any income received from any services provided to other taxi businesses. There is one bit of good news - tips are not to be counted in the turnover calculations.

WE’VE READ ABOUT A VAT ‘FLAT RATE’ FOR TAXI DRIVERS OF 10%. WHAT DOES THIS MEAN AND HOW DOES IT WORK?

Under normal VAT rules a business pays 20% VAT on its income once registered for VAT. They can also offset the VAT they have to pay by reclaiming VAT they have paid on their costs such as car leasing, fuel & vehicle repairs. However small small businesses can elect to use the ‘Flat Rate Scheme’ & claim no VAT back on their costs and in return pay only 10% VAT on their income. Each driver will havetoworkoutwhichoptionisbestfor them.

AS YOU KNOW, LICENSED TAXI DRIVERS CANNOT ADD VAT ONTO METERED FARES. CAN YOU EXPLAIN WHY THAT IS AND HOW IT AFFECTS THE DRIVER’S ANNUAL TAX RETURN SHOULD THEY GO OVER THE £85,000 LIMIT?

Taxi fares are set by local authorities in the UK, or by TfL in London. VAT cannot be added onto this fare as it would result in the fare to the customer being over the legal amount.

Private Hire and Uber drivers are not subject to these rates set by local authorities.

IF A DRIVER GOES JUST £1 OVER THE THRESHOLD HOW MUCH IN VAT WILL THE CABBIE HAVE TO PAY?

Turnover for considering the VAT registration requirement is calculated on a rolling twelve months. At the end of each month the business has to look back and see if they have exceeded the VAT registration limit for the past year. If they are over they must register for VAT within 30 days.

Once they are registered by HMRC VAT is due on all income not just the element above £85k.

HOW MUCH MORE WOULD THE DRIVER HAVE TO TURNOVER TO MAKE GOING PAST THE THRESHOLD WORTHWHILE?

This depends – if a driver takes £85,001 in a year and is then registered for VAT he will incur an annual VAT liability of approximately £14k on his income. However, he will be able to recover VAT paid on his fuel, car lease and repairs, so the net cost to the driver may be between £8k and £10k per year.

Disclaimer - Please be aware this article is for information purposes and does not constitute formal tax advice. Each individual’s circumstances are different, and they should contact a tax professional for specific advice.