Fare dues: Taxi firms need to add VAT to chargesby
The High Court has sided with Uber, ruling that rival ride-hailing companies should also be subject to a 20% VAT levy on their profit margins. Experts say this could open the sector for HMRC probes into backdated taxes.
Cab firms outside London may have to raise their prices by a fifth following a decision in the High Court that the entire taxi trade may have to add VAT to their fares.
A decision by the Supreme Court in 2021 that drivers for Uber should be classed as workers brought tax obligations and other administrative changes for the app, which began collecting VAT in March 2022.
In response, Uber filed a claim against Sefton Council, which licenses it in the UK.
As the first judgment related only to activity in London, Uber sought to level the competitive playing field by asking the courts to apply the same ruling to private cab firms across the rest of England and Wales, totalling around 16,000 businesses.
Uber cited the 1976 local government licensing law under which it and others are regulated, asking the High Court to rule on contracts between private-hire taxis and their passengers.
It argued that private taxi operators outside London must change their operating terms and conditions with passengers in line with Uber’s obligations, meaning the operator is providing the taxi service as the principal not as an agent, and therefore is liable for VAT.
While private drivers working for the operators generally fall below the UK VAT registration threshold of £85,000 and so do not charge VAT, operators are over the threshold and are liable.
Contract with passengers
On Friday, Judge Alison Foster agreed that companies with a private-hire vehicle operator’s licence are entering into a contract with their passengers, meaning other ride-hailing apps must pay value-added tax at 20% on what they make from fares.
“I have come to the clear conclusion that Uber’s suggested construction of the 1976 Act is correct. Accordingly, the question posed is to be answered ‘yes’,” the judge said.
In a statement, Uber said the ruling “resolves a major inconsistency in the way that rules have been applied for private hire operators across England and Wales”.
“While it clarifies many key points, there remain questions on VAT and what passengers should pay,” it added.
In November 2022, Uber announced it had resolved one VAT wrangle with HMRC by paying HMRC £615m to settle all outstanding claims. However the sum was considerably lower than the £1.5bn number HMRC had estimated.
Meanwhile, in its second quarter financial results, Uber revealed this week that HMRC is pursuing the ride-hailing app for another £386m in VAT since it changed its business model in March 2022. Uber paid the assessment in July 2023 and will dispute it in the tax courts, but noted that the payment will affect its Q3 2023 operating cashflows, but it will have no impact on its income statement.
Tax inspectorate on alert
HMRC is monitoring the Sefton case, noted Richard Asquith, tax expert and CEO of VATCalc, which could have ramifications for taxi firms and their accountants.
“For ride-sharing platforms, the original Uber hearing has been viewed as only requiring VAT charges on the platform’s share of the fare – not the whole fare. Uber, Bolt and Freenow follow this policy today per their invoices,” he said.
Accountants should liaise with the tax authorities to understand if and how they will follow the High Court ruling, he said, as they will also need to ensure their impacted clients “are aware of this very complex issue”, including the significant tax obligations now coming their way.
“Cab companies now need to be adding VAT to their charges, which they typically will not have the accounting systems to calculate or invoice,” he told AccountingWEB.
“There is also the risk of the tax authorities coming for back-dated tax,” he said. “Uber for instance had to put nearly $1bn (£780m) aside in its last UK accounts to cover prior years.”
Lawyers acting for the private hire cab firms said the outcome had been “heavily influenced” by a previous case relating to London taxis, which Uber was also involved in.
“We are disappointed at the outcome and are taking time to consider and reflect on the judgment,” said Layla Barke-Jones, partner in the dispute resolution team at the law firm Aaron & Partners, representing a group of Liverpool-based taxi firms, including Delta Taxis.
“It is important to remember that this case was not about Delta’s tax liability but the potential for HMRC to require Delta to collect VAT for HMRC,” she said. “Delta’s stance in this case has been to try to protect the passengers. Given the potential for such large fare increases this now requires urgent government action to prevent VAT from being charged on private hire fares.”
The calculations are complex, Asquith said, given the reversing out of VAT, “and will have serious cashflow implications and cab firms will not have been planning for this”.
An accounting expert close to the issue said despite the big headlines following the Uber versus Transport for London (TFL) case in London, for many operators not much changed.
Of more concern will be the intentions of the government and HMRC, they said, given ministers had said they were paying close attention.
“HMRC now has us in their sights,” they said. “While the case’s primary focus was on employment status, it also brought attention to the VAT obligations of ride-sharing platforms.”
The verdict maintains the status quo as set by the TFL case, “but we have yet to see
what that status quo looks like in practical terms,” they told AccountingWEB.
“It could have far-reaching consequences, impacting other gig economy companies operating in the UK,” they said. “As the ride-hailing industry continues to evolve, the legal and regulatory landscape surrounding the gig economy and VAT will remain an area of close scrutiny for businesses, workers and policymakers.”
The case also reflects a global trend by tax authorities to hold intermediaries, including ride-arranging platforms, as the service provider, Asquith added.