Uber prices set to soar as ministers introduce VAT crackdown
Prices on ride hailing apps like Uber are set to soar, after the government ploughed ahead with a promise to apply VAT to online mini cab companies despite warnings from the industry that the move would worsen the cost of living.
From Friday, private hire vehicle operators in London will no longer be able to use a little-known tax rule known as the Tour Operators Margin Scheme to reduce the VAT they pay on fares.
Win for black cabs
The crackdown, first announced by the Chancellor at November’s Budget, will bring the tax paid by the likes of Uber and Bolt in line with that of black cabs, after years of campaigning from taxi drivers and their representatives.
Black cab drivers have launched multiple legal challenges against ride hailing apps’ use of the tax scheme, which was originally intended for tour operators and allows firms to pay VAT only on their profit rather than a full fare. The licensed taxi drivers lost both legal battles, but have continued to lobby ministers arguing the uneven tax could jeopardise the future of black cabs in London.
“The government’s decision to apply VAT to all private hire journeys is a landmark step for fairness and integrity in our industry,” said Steve McNamara, general secretary of the Licensed Taxi Drivers Association.
“For too long, drivers and small operators paying the full 20 per cent VAT have had to compete with online mini cab firms benefiting from a niche tax scheme.”
Less work for Uber drivers
The clampdown has sparked a string of warnings that online ride hailing firms will be forced to raise their prices, fuelling fresh concerns around the cost of life in the capital after two consecutive tax-raising Budgets.
Commenting after the plans were first unveiled at the Budget, Andrew Brem, Uber’s general manager in the UK, said the overhaul would “mean higher prices for passengers in London” and a dearth of work for drivers “when people are already struggling with the cost of living”.
“The courts have twice ruled that the Tour Operators’ Margin Scheme applied to operators like Uber,” he added.
“This decision also establishes the absurd situation where a trip in London will be taxed at a different rate than a trip anywhere else in the UK.”
The shake-up, which has been branded the ‘taxi tax’, is expected to generate some £700m for the Treasury by 2028.
However, several other industries – including the UK’s beleaguered hospitality sector – have also warned the move would will have damaging knock-on effects.
Bars and restaurants fear it will further dampen demand for meals out, after they were already to shoulder several sharp tax increases including hikes to their business rates and payroll tax bills.
In a letter to the Chancellor ahead of the Budget, bosses from Uber and Bolt also warned it constituted a breach of Labour’s pre-election manifesto, which promised to to raise VAT, income tax or national insurance. They added tat the average fare would go up by as much as 15 per cent.
Rachel Reeves said: “We’re putting the brakes on the illegitimate use of a niche tax scheme to protect everyday cabbies. We’ll use the £700m a year this raises to deliver the country’s priorities – cutting the cost of living, cutting waiting lists and cutting debt and borrowing.”
The impact of the change will be restricted to the capital, where local regulations forbid ride hailing operators from acting as an agent. Under the agency model, which Uber is currently making its default operating model elsewhere in the UK, the driver – not the company – is providing the transport.
This means that outside London the firm will only pay VAT on its commission, while most drivers are unlikely to have to pay the consumption tax as their earnings rarely surpass £90,000, the threshold at which corporate VAT kicks in.