Uber VAT bill could top £1.5bnby
A High Court ruling means that Uber must charge VAT at 20% on the full fare paid by passengers and pay VAT that should have been charged in earlier periods.
Uber is a ride hailing app that allows drivers operating under Uber’s banner to be matched with people looking to be driven from A to B.
Up until now, Uber has always been of the opinion that the actual transport service is being provided by the driver to the customer. Uber merely brings the two parties together (the agent) and so only charges VAT on the commission it receives from the driver (the principal).
The drivers themselves have been obliged to treat the entire fare as their own income for VAT purposes. The majority of drivers will not be registered for VAT as their total income is below the VAT registration threshold of £85,000, so effectively most Uber fares have historically been VAT-free.
Worker, employee or self-employed?
Earlier this year the Supreme Court (SC) ruled that Uber drivers were workers, as opposed to self-employed. This meant that the drivers were entitled to certain benefits enjoyed by employees, such as minimum wage and holiday pay.
This ruling also reclassified the drivers for VAT purposes. A self-employed person must keep track of their turnover and charge VAT once they are over the registration threshold. A worker/employee on the other hand cannot register for VAT. Their income is instead treated as their employer’s.
So once Uber’s drivers were treated as workers, all their VAT responsibilities were effectively passed to Uber.
This is certainly HMRC’s view as, late last year it raised a VAT assessment against Uber, reputedly to the tune of £1.5bn.
Uber is licensed under the Private Hire Vehicles (London) Act 1998 (PHV) as a requirement to operating in London. During the SC case, Uber repeated the argument that it was merely an agent for the drivers and did not provide the actual transport service.
Without ruling either way, the SC suggested that in order to comply with the PHV, Uber had to act as a principal to the passenger. The app’s agency stance would therefore prevent from complying with the PHV, and so unable to operate in London.
Uber disagreed and took the case to the High Court (HC).
High Court decision
Uber, along with Free Now, a similar ride hailing business, argued that the PHV does not stipulate any particular contractual relationships or business models. They also argued that accepting a booking and accepting an obligation to carry out the journey were two entirely separate things.
The HC disagreed, taking the stance that both acceptances were one and the same. The judges felt the language in the PHV clearly expects that the acceptance of a booking by the operator (in this case Uber) creates a contract between the operator and passenger.
From a public safety standpoint, which is one of the aims of the PHV, the HC felt the operator had to be treated as responsible for the safety of the passenger. The alternative is that this responsibility lies with the drivers.
Imagine a vulnerable person who uses the Uber app to get a lift home at midnight. A driver is assigned but never arrives or removes their acceptance at the last moment. If that person then suffers injury, could a specific driver even be identified and blamed for the reneging of the agreement, let alone have deep enough pockets for a satisfactory claim to be made?
The previous version of the PHV stated the perceived operator responsibility much more clearly and, the HC again felt, the intention of the act had not altered in this regard between versions.
The court concluded that Uber had to undertake a contractual obligation to its customers in order to operate lawfully.
Long term effect
Uber’s business model is not compatible with the HC ruling and so must change following this ruling. Uber must take the position of principal in the transaction with the passengers and must take full responsibility for the passenger’s safety.
All the fare income generated will therefore be via Uber’s VAT registration and the price structure must alter to reflect this.
Many other ride hailing businesses will no doubt also be affected by this ruling and so will need to similarly consider their position.
Uber issued a statement saying that “all the details of the Supreme Court ruling are now clear”. This would therefore appear to be the end of the story, apart from the little matter of the £1.5bn VAT bill.