WHAT THIS MEANS: Government confirms full 20% VAT will hit private hire fares as TOMS loophole closes
- Perry Richardson
- 13 minutes ago
- 4 min read
The Treasury has ruled out a reduced VAT rate or sector-specific margin scheme for private hire vehicles and will exclude operators from the Tour Operators Margin Scheme from January 2026.
The Government’s formal response to its consultation on the VAT treatment of private hire vehicles confirms that all VAT-registered PHV and taxi operators will remain subject to the standard 20% rate on fares, while attempts by large platforms to use the Tour Operators Margin Scheme (TOMS) will be shut down through new legislation. The decision locks in higher tax liabilities for major ride-hailing firms and clarifies the landscape for smaller operators and licensing authorities ahead of the 2 January 2026 deadline.
The Treasury document, published in November 2025, confirms that PHV services “are, and always have been” standard-rated, but acknowledges that many operators previously treated themselves as agents rather than principals, which meant VAT was charged only on a narrow commission slice of the fare.
Following High Court rulings in 2021 and 2023 on operator contractual status, and subsequent appeals culminating in a Supreme Court judgment in 2025, some platforms operating as principal sought to apply TOMS and cut their effective VAT rate to around 4 percent. The Government states bluntly that this is “not appropriate” for the sector and has confirmed it will legislate through the Finance Bill 2025-26 to exclude PHV and taxi services from the scheme, except where supplied in conjunction with certain other travel services.
According to Treasury estimates certified by the Office for Budget Responsibility, ending PHV and taxi access to TOMS will secure about £700 million per year in additional revenue, with total VAT measures linked to PHV reform forecast to raise around £1 billion by 2029-30. The response notes that, while only a small number of PHV operators currently exploit TOMS, the tribunal decisions earlier this year risked making use of the scheme mandatory for any operator falling within scope, regardless of size. Officials judged that outcome to be both administratively burdensome for smaller firms and distortive for competition, because the scheme is more easily managed by large, well-resourced platforms.
The consultation received 86 responses from drivers, operators, trade bodies and licensing authorities between April and August 2024, generating sharply divergent views on how VAT reform should proceed. Some PHV businesses and advisers urged the Government to adopt a reduced 5 per cent VAT rate, zero-rate PHV journeys, or create a bespoke margin scheme that would tax only the difference between passenger fare and driver commission. Others, including parts of the taxi trade, argued that keeping the full 20 per cent rate was the fairest outcome and warned that special reliefs for PHVs would distort competition with hackney carriage services that already charge VAT where they exceed the turnover threshold.
Treasury modelling put the annual cost of a reduced 5 per cent rate at around £1 billion and a zero rate at £1.5 billion, while a bespoke PHV margin scheme was estimated at £750 million. In its response, the Government concludes that “neither a reduced rate, a zero rate, nor a margin scheme can be justified” in the current fiscal environment, arguing that a large tax break for one transport segment would not represent good value for money when weighed against pressures on wider public services.
The document also rejects a technical change to VAT law that would have allowed PHV operators to be treated as agents for tax purposes while contracting as principals in commercial terms, citing concerns about legal complexity, misalignment with VAT’s “economic reality” principle and the risk of creating an unjustified tax advantage on corporate account work where operators have long paid VAT as principal.
For operators and local authorities, the response provides long-awaited clarity on whether the Government would revisit PHV licensing legislation in England to mitigate VAT impacts. Ministers confirm they will not proceed with legislative changes at this stage and will instead leave in place the split regime under which London operators are required by court judgment to contract as principals, while those elsewhere in England and Wales are not.
The Government concedes that this creates differences in how VAT applies to competing business models but says any move towards a single-tier taxi and PHV system, or wider re-write of licensing duties, could undermine passenger safety, complicate enforcement and increase compliance costs for councils.
On targeted mitigation, the Treasury keeps options open without committing to concrete measures. The consultation highlighted potential reliefs for demand responsive transport, expansion of existing schemes such as the disabled person’s bus pass and Bus Service Operators Grant, and support for community transport run by councils and charities.
For the PHV and taxi industry, the package draws a line under years of uncertainty over how ride-hailing platforms should be taxed and regulated following successive court cases. The sector now has just over a year to adjust business models, pricing strategies and driver arrangements before the new rules take effect.
RELATED NEWS ARTICLE:
