VAT CHANGES
GOVERNMENT ANNOUNCES VAT CHANGES FOR LARGE PRIVATE HIRE AND TAXI OPERATORS
The government has announced plans to change the VAT treatment of taxi and PH journeys from 2 January 2028, targeting larger operators while excluding smaller businesses from the new rules.
The announcement, published by HM Revenue & Customs (HMRC) on 29 October, follows years of uncertainty over how VAT should be applied to PH fares. Under the proposed legislation, larger operators acting as agents for drivers would be treated as supplying the transport service themselves for VAT purposes. Affected operators would therefore have to account for VAT on the full passenger fare, rather than just the commission or booking fee they receive.
£50 million threshold proposed
The government intends to limit the new rules to businesses exceeding a specified annual passenger fare turnover threshold. Its preferred figure is £50 million, although the final threshold will be determined following consultation. Crucially, this refers to the total value of passenger fares handled, not the operator’s commission or profit. An operator processing £60 million in annual fares could therefore fall within the rules even if its com- mission income is considerably lower.
An important question for larger operators will be how the threshold is calculated, particularly where businesses operate through multiple companies, subsidiaries or different trading structures. This will need clarification as the legislation develops.
Smaller businesses below the 30
eventual threshold would remain outside the new provisions, although existing VAT obligations would continue.
Why are the changes being introduced?
The announcement addresses longstanding differences in VAT treatment between London and the rest of the country. In London, PH operators must contract directly with passengers and act as the principal supplier of the journey. Outside London, operators can act as agents for self-employed drivers, with the driver supplying the transport service directly to the passenger. Under genuine agency arrangements, the operator generally accounts for VAT on its commission or booking fee, while the driver is responsible for VAT on the fare if VAT registered. The government believes these differ- ences create an uneven playing field between competing operators.
How does this differ from January 2026?
The announcement is separate from changes introduced on 2 January 2026, which removed the ability to use the Tour Operators’ Margin Scheme (TOMS) for taxi and PH journeys supplied on their own. Previously, some operators used TOMS to account for VAT on their margin rather than the full fare. However, removing TOMS did not abolish genuine agency arrange- ments outside London. The latest proposals would require larger operators using agency arrangements to account for VAT on the full fare, subject to the final legislation.
What about drivers and passengers?
The government has not introduced a blanket requirement for taxi or PH drivers to register for VAT. HMRC says some drivers may choose to register voluntarily, but it does not expect substantially more businesses to become legally required to register. However, affected operators may review their commission structures, payment systems or commercial arrangements. Passenger fares could also increase if operators pass on additional VAT costs. HMRC has not estimated how much fares might rise, and the impact will depend on individual operators’ existing VAT arrangements. The government’s assessment acknowledges that passengers with mobility difficulties make more PH journeys
annually than those
without, raising concerns about possible fare increases.
Millions in additional vat revenue
The Treasury estimates the measure will raise £95 million in 2027–28 and £385 million in 2028–29, increasing to £425 million by 2031–32. The government will consult on the turnover threshold and detailed legislation before implementation. For the trade, the key questions are whether the changes will deliver fairer competition, how larger operators will respond and whether passengers will face higher fares.
Importantly, this is not a blanket new VAT charge on all taxi and PH operators. The proposals target larger businesses operating through agency
arrangements,
with smaller operators intended to remain outside their scope.
NOVEMBER 2026 PHTM
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