It has long been accepted practice in most areas of the United Kingdom, that when a taxi company takes a private booking, it does so as an agent, with the self-employed driver acting as principal service provider.
This definition leads to a VAT outcome whereby the driver (usually unregistered and operating below the VAT threshold) does not charge VAT on the fare itself but is charged an agency commission fee by the taxi firm, which is subject to a VAT charge.
HMRC challenged this position in a recent tax tribunal with regard to supplies made by Uber. It was ruled that the fares were provided as principal, resulting in a change in VAT accounting, and a backdated financial liability for Uber of over £600m.
Subsequently, Uber successfully challenged the local licensing authority (Sefton Borough Council) on their position as principal in the High Court. The subsequent judgement was that the local authority can no longer act as agent – the knock on effect being that VAT must be charged on the whole fare.
There is clearly a major VAT problem on the horizon for taxi firms if local licencing authorities follow the Sefton judgment and rule that a taxi firm must in future take private bookings as principal. Having a driver acting as principal service provider and not charging VAT on the fare is no longer an option, meaning the cab firm must account for VAT on the whole fare.
Good news (possibly)
There may be an opportunity to use the Tour Operators Margin Scheme (TOMS) to reduce VAT liability due on fares provided as principal. We understand this point which has recently been in the spotlight in relation to holiday accommodation , resulting in a victory for the taxpayer will be litigated in terms of taxis in due course.
There are still many unknowns with regard how this situation will develop, but we would recommend you engage with a reputable firm that can provide reliable VAT advice.
At Scrutton Bland our VAT team combines many years of technical expertise with practical experience to assist with any VAT challenges your business may face, including VAT advice, disputes and compliance services. Our aim is to provide high quality advice and to find pragmatic, cost-effective solutions in a friendly no-nonsense way and without using confusing jargon.
Contact Daniel at email@example.com or phone him on 0330 058 6559.