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ZERO VAT REVIEW: PHV drivers would be able to claim VAT on purchases and not charge passengers

The Government is contemplating a number significant changes to the VAT system that directly affects private hire vehicle (PHV) drivers across the UK. Under a raft of suggestions put forward in a new Government consultation, one of the options could see PHV services subject to either a reduced VAT rate of 5% or could be zero-rated.

Crucially, the options could alter the current financial landscape for 10,000’s of drivers.

The proposed adjustment to a 5% VAT rate would represent a substantial shift, projected to decrease government revenue by approximately £1 billion annually. Alternatively, a zero rating scenario would have an even more profound impact, potentially reducing the Exchequer's intake by an eyewatering £1.5 billion each year. This steeper reduction stems from the broader scope of the zero-rating measure, which would not only overturn a previous court decision but also cut or eliminate VAT on drivers’ agency fees. Historically, these fees have consistently attracted the standard VAT rate.

A notable advantage of the zero-rating proposal is its potential to motivate currently unregistered PHV drivers to formalise their VAT registration. This change would allow them to reclaim VAT on significant expenses such as vehicles and fuel, without the requirement to charge VAT on the transport services they provide to customers.

Notably, the consultation papers only highlight potential changes to the PHV industry and there is no mention of the Hackney Carriage taxi sector. If PHV operators are able to reduce fares without the need to pay VAT, coupled with PHV drivers able to claim back significant VAT costs on vehicles and fuel, this could impact the competitiveness.

This significant potential reduction in VAT income will be a critical factor for the Government to consider, as it balances the goals of supporting the PHV sector and ensuring adequate revenue for public finances. The huge financial figures discussed highlights the economic impact of these VAT changes on the Exchequer and details the need for careful policy planning and stakeholder engagement in deciding the final approach.




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