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  • Mr Paul Clifton

The Uber case and VAT on taxi fares

Until now, you most probably would not have recovered VAT on taxi fares through Uber. Similarly, unless you were being charged by a larger taxi company, rather than a one person self-employed taxi driver, you also would most probably not have recovered VAT on your taxi fares.

Uber did not charge VAT because it treats each of its drivers as a separate self-employed business. Transport services are standard rated (20%) for VAT purposes except where a vehicle can carry ten or more passengers. Therefore, VAT is not charged on train and bus fares etc.

Uber has said it may soon have to start charging its UK customers VAT at 20%, after a High Court judgement. This judgement will probably push up the cost of taxi rides.

It comes after a judge ruled that Uber, and similar private hire taxi operators, make contracts with their customers rather than the person driving the taxi. It could have far-reaching consequences for the industry and other private hire firms may also have to starting charging VAT on their fares.

The case referred to the Private Hire Vehicles (London) Act 1998 which only applies in the UK capital of London. However, Uber and the App Drivers and Couriers Union, which was a defendant in the case, both expect the ruling to be followed by licencing authorities across the UK.

Therefore, if you use the services of Uber, and so long as you obtain a VAT invoice etc, you should soon be able to recover VAT on your taxi fare….. though the fare may have to increase to cover the extra VAT charged by Uber.

The case

The High Court ruling on 6 December 2021 means that Uber must now charge VAT at 20% on the full fare paid by passengers and also pay VAT for earlier VAT periods.

Uber is a ride hailing app that allows drivers operating under the Uber’s banner to be matched with drivers to take them from place A to place B.

Up until now, Uber has been of the opinion that the actual contract for transport service is made between the driver and the customer. Uber claimed that they were just an IT technology company that brought together the two parties, as agent only, and so only charged VAT on the commission that it receives from the driver.

The drivers themselves have been obliged to treat the whole fare as their own income for VAT purposes. The majority of drivers are not registered for VAT as their total income is below the compulsory VAT registration threshold of £85,000. As a result most Uber fares have historically been VAT-free, as the taxi driver/firm is not VAT registered.

Taxi drivers’ employment status

Earlier this year, in a key employment status case, the Supreme Court ruled that Uber drivers were workers, as opposed to self-employed. This means that the taxi drivers are entitled to certain employment relayed benefits e.g. minimum wage, holiday pay, pension scheme etc.

The court decision also reclassified the taxi drivers for VAT purposes. Once Uber’s drivers are treated as workers, all their VAT responsibilities are effectively passed on to Uber.

A self-employed person must monitor their own sales income and register for and charge VAT once their turnover exceeds the registration threshold. A worker or employee, on the other hand, cannot register for VAT as they are not in business on their own account. Therefore, the income received by the driver is instead treated for VAT purposes as their employer’s and covered by their employer’s own VAT registration scheme. It will therefore cause more taxi drivers, through the firms that they work for, to register for and charge VAT to their customers.

HMRC have already issued VAT assessment against Uber, supposedly for around £1.5bn.

The operator’s license

Uber is licensed under the Private Hire Vehicles (London) Act 1998. This is a requirement of operating in London. During the Supreme Court case, Uber repeated the argument that it was merely an agent for the drivers and did not provide the actual transport service.

However, the court concluded that Uber must undertake a contractual obligation to its customers in order to operate lawfully under its operator license. Uber must take the position of principal in the transaction with the passengers and must take full responsibility for the passenger’s safety. As a result, the ‘self-employed’ driver could not operate lawfully without working under the banner of Uber’s operator’s license.

Long term effect of this court case rule

Uber’s business model is not compatible with the High Court ruling and so must change following this ruling. All the taxi fare income arising will therefore be recorded through Uber’s own VAT registration. It is therefore expected that the price structure must change to show this new trading arrangement.

It is expected that many similar ride hailing businesses will also be affected by this court ruling. I’m sure HMRC will be reviewing other taxi firms that create a direct contractual relationship between themselves and their customers.

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