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Taxi VAT

We have a client who runs a taxi operation. They own the cars and pay for all running costs. 

They pay the drivers a share of the takings.

Say, the driver earns £1000 a week. They would say give the driver £400 and keep £600.

Now, as the drivers are not VAT registered they are taking that £600 and applying 20% VAT to it and paying the £120 over to the treasury.

Is this right or should the money be treated as received gross and then they should divide it by 6.

If it's 20% then it seems to be they are being unfairly penalised as they've never received the VAT.

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Flawed

Your logic is a bit flawed but your conclusion is right. The VAT is £100 not £120.

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Two sides to the coin

The drivers are paid £400 (a wage) and not VAT registered so no input tax to claim.

As for the gross takings of £1000, this is subject to output tax equal to 1/6 = 166.66r and not 20% on the balance of £600.

Output tax should be calculated on all of the takings and not after taking off the drivers payment.

I may be wrong, but then what an easy way to reduce your net liability?

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Yes, this is what I think..

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Ah but should it be all the money because the drivers are technically self employed?

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That's the point

I'm interpreting the situation as self employed drivers and the company charging for car hire and admin. That's the usual set up. If the drivers were getting a wage this should be subject to PAYE.

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HMRC View

Try the following notice.

HMRC Reference:Notice 700/25 (May 2002) para 3.2

 

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Sounds like rent a chair in the hair dressing business.  I would have thought that the cab firm only has drivers that are self employed as customers and the drivers have the general public.  Likely that there is only VAT on the charge to drivers aka the radio charge

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So just so I understand

Assuming each driver is SE, the taxi firm would charge them £x + VAT service fee, and each driver would charge its customers £y (+VAT if they happen to pass the threshold).  The driver is supplying the services of transport, the taxi rank is purely acting as intermediary.

Unless I'm missing something, this is not similar to the hairdressing VAT conundrum... is it?

 

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agency

I believe your client is acting as an agency in this situation.  If I was their accountant I would be looking at the working practices of the business and doing everything possible to swing the balance towards agency!

This is a bit like IR35, unless the client is fully aware of the rules then they can normally make subtle (low hanging fruit) changes to their working practices which are no skin off anyone's nose and swing the balance more firmly in favour of an agency relationship and not a principal one.  Extract follows from HMRC VAT site on "Taxis":

3.4 Agent for both cash and account work

Whether you are acting as an agent depends on the terms of any written or oral contract between you and the drivers, and the actual working practices of your business. For further information on how to decide whether you are acting as an agent or a principal see the section dealing with agents in Notice 700 The VAT Guide. Typically in acting as an agent for your drivers you will:

relay bookings to the drivers (usually on a rota basis) for an agreed feepossibly also provide them with other services such as the hire of cars or radios andcollect fares on their behalf from account customers.

If you act as an agent, the drivers are entitled to the full fares paid by the customers, even though the charge for your agency services may be deducted from the account fares you collect for them.

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Regarding rent a chair; the shop owner provides infrastructure but the stylists are self employed and have their own clients.  The stylists pay a weekly fee to the shop owner and keep their sales so very much like the taxi driver example.  This does need to be structured properly.  One impact is that 5 independent stylists all billing 20k each will pay no VAT whereas an owner managed salon will need to be VAT registered.  There is also no payment of e'er NI as the stylists are self employed.  

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