The Government consultation on VAT for private hire vehicles shaping reports of Autumn Budget ‘Taxi Tax’ hike
- Perry Richardson
- 2 hours ago
- 4 min read
A government consultation into the VAT treatment of private hire vehicle (PHV) services closed some time ago last year, with the outcome finally expected to feed directly into the Chancellor’s Autumn Budget later this Autumn Budget.
Reports suggest that a 20% VAT charge on all PHV fares is being lined up, a move that could have widespread consequences for operators, drivers and passengers.
The consultation, launched in April 2024, followed two important High Court judgments involving Uber. The first, in 2021, ruled that under London’s PHV legislation operators must contract with passengers as principals when accepting bookings. A second case in 2023 extended the same principle to the rest of England and Wales, although this was overturned on appeal this year. In London this meant that PHV operators, not individual drivers, are legally responsible for providing the booked journey. Although these rulings did not directly concern tax law, they triggered significant VAT implications. Once operators are deemed the principal supplier of services, VAT-registered firms must charge 20% VAT on the full fare.
For years, most PHV operators outside London argued they acted only as “agents” for drivers. Under that model, VAT was charged only on commission or agency fees where applicable, not on passenger fares. The consultation confirmed that many large operators, particularly in London, had already shifted to charging VAT on all fares following the 2021 judgment. However, the majority of smaller and regional operators continued with the agency model. Treasury analysis estimated that bringing all operators into line could raise as much as £750 million annually.
The Government used the consultation to gather evidence on the potential impact of this change. Officials acknowledged that fare increases are likely, but suggested they would be relatively modest when averaged across the whole market. Their analysis estimated that fares could rise between 1.25% and 2.5%, adding an average of £2.70 to £5.60 per year to passenger travel costs. The Treasury also forecast a potential reduction in overall PHV journeys of a similar percentage. However, the impact is expected to fall unevenly. Larger London-based operators already apply VAT to all fares, meaning passengers there would see little change. Smaller operators outside the capital, particularly those serving local communities, could face greater disruption.
Several options were put forward in the consultation. One approach would be to amend PHV or VAT legislation so that drivers, rather than operators, contract directly with passengers. But officials concluded in the consultation that such a change could collapse the current two-tier system that distinguishes taxis, which can be hailed or taken from ranks, from PHVs, which must be pre-booked. Moving towards a single-tier model could undermine licensing structures, reduce consumer choice and potentially weaken safety standards.
Another option considered was to amend VAT law to allow operators to act as principals for contractual purposes but as agents for tax purposes. This would stop VAT being added to full fares but preserve passenger protections. However, within the consultation papers are concerns that this would create a legal “fiction” within VAT law, undermining the principle that tax follows the economic reality of contracts. Such an exception, it argued, could introduce uncertainty and increase litigation risk.
Mitigation measures were also explored. These included reducing VAT on PHV fares to 5%, zero-rating the service altogether, or introducing a new margin scheme that would allow operators to pay VAT only on their commission margin rather than the full fare. The Treasury noted that zero-rating would cost the Exchequer around £1.5 billion annually, while a reduced rate would cost about £1 billion. A bespoke margin scheme was estimated at £750 million a year. Ministers also raised doubts about whether tax cuts would be passed on to passengers, warning that operators might absorb the benefit without lowering fares.
Alongside these tax-focused measures, the consultation asked whether targeted support for vulnerable groups should be considered instead. One suggestion was to zero-rate demand responsive transport, such as minibuses and community services in rural areas. Other ideas included widening eligibility for disabled bus passes or expanding funding for local community transport schemes.
Responses to the consultation are now been reviewed by HM Treasury, HMRC and the Department for Transport since it closed a year ago. The Government has said it will publish a formal response in due course, but the timing and reports from main stream media outlets suggests the conclusions are expected to be announced in the Chancellor’s Autumn Budget. Sources believe the Treasury is most likely to adopt the straightforward option of confirming the 20% VAT charge across the board, rather than pursuing costly or complex alternatives.
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If that happens, the question will be how the burden is shared. Operators could pass on costs directly to passengers through higher fares, absorb part of the hit within their margins, or shift pressure onto drivers by adjusting commission rates. Each outcome would have knock-on effects for affordability, service availability and driver earnings.
For passengers, particularly those outside London who have so far been shielded from VAT on fares, the change could be more noticeable. For drivers, it could mean tougher conditions in a market already challenged by rising fuel, insurance and licensing costs. For operators, it presents a test of how to balance competitiveness with compliance in a more tightly regulated sector.
