Short and Sons Accountants are no strangers to London's black cab industry, nor are we strangers to VAT. Black cab drivers and Private Hire Vehicles (PHV) must register for VAT when their turnover goes above £85,000 on a rolling 12-month basis. This article will discuss the unique predicament VAT puts black cab drivers in, possible changes to the ruling and what options are currently available.
DISCLAIMER: The VAT threshold will increase from £85,000 to £90,000 on April 1, 2024. Please bear this in mind while reading.
VAT The official guidance for VAT is: You must register if:
your total VAT taxable turnover for the last 12 months was over £85,000 (the VAT threshold)
you expect your turnover to go over £85,000 in the next 30 days
This means that once your earnings are above £85,000, you must start charging 20% VAT to your customers, which will go to HMRC. However, you will be able to claim back VAT on your VATable expenses, such as fuel. Black cab drivers and PHV operate on tight profit margins as it is. With rising fuel prices, maintenance costs, and regulatory fees, their earnings are already under pressure. Adding a 20% VAT burden on top of these expenses will undoubtedly have a significant impact on their take-home income. Competitive disadvantage for black cab drivers
The VAT system intends to tax the end consumer; this creates a unique challenge for black cab drivers. Unlike ride-hailing companies, black cabs are legally bound by a metered fare system, which means they cannot charge more than the metered amount. This limitation prevents them from passing the VAT cost to their passengers by increasing the fare by 20%. This creates a competitive disadvantage for black cab drivers because they will suffer the 20% burden, whereas ride-hailing apps like Uber can adjust their fares to account for the VAT. Drivers using the metered fare system would have to get around this by verbally specifying a price before agreeing the job and not using the meter. This comes with a whole range of its own problems, as it means negotiating with every single passenger, over/under charging, lack of proof for the agreed fee and many other issues which can cause real headaches for cabbies.
Current ruling
Recently, the private hire services 'Bolt' won a case that changed the ruling for VAT turnover. Historically, VAT is calculated on one's total turnover. So if you have earned £100,000 before expenses and excluding VAT as a PHV for Bolt, then the VAT that you will owe is £20,000. However, after the recent case, Bolt has successfully argued that the total turnover for VAT purposes should not include the commission that Bolt takes; therefore, if you earned £100,000, but Bolt has taken £10,000 commission, then the VAT you owe will be 20% of £90,000, which is £18,000. This is a step in the right direction regarding VAT for taxis and PHVs, and it also shows that the government are taking notice of the industry's struggles and is open to change. Another ruling that is worth mentioning is the VAT Flat Rate Scheme. This could be a beneficial option for black cab drivers and PHVs as it means they pay a fixed rate of 10% VAT to HMRC. However, you cannot claim back VAT on expenses. Here's how it compares to the standard VAT scheme:
Normal VAT | Flat Rate Scheme | |
Ride Fare | £100 | £100 |
+20% VAT | £120 | £120 |
Amount paid to HMRC | £20 | £12 |
This can be a clever option for reducing your VAT liability, but the only expenses you can claim the VAT back on are capital assets worth over £2000, such as a shiny new TXE. Also, the scheme isn't available if your VAT turnover is over £150,000, and it doesn't address the issue of being unable to charge VAT on metered fares. Seeking solutions
The government must acknowledge black cab drivers' unique situation and find a fair solution to address the concerns.
If VAT for the Taxi industry were slashed to zero per cent, it would be a massive win for taxi drivers and PHV alike because it would allow them to not charge VAT to customers but still reclaim VAT on expenses. Butchers who are zero-rated register as soon as they start trading to claim VAT back on costs and drive up profits. If a zero per cent rating were given to the taxi industry, it would undoubtedly cause a massive rush to be VAT registered. We think this would be an incredibly generous gift from the government on top of the £7500 OLEV grant they have already been running for the industry and is unlikely to happen.
A more likely option is for the taxi industry to be exempted from VAT. This differs from zero per cent VAT as exempt businesses cannot claim VAT on their expenses but also do not charge VAT. This means that the income and expenses would remain as they are, with no VAT being paid to HMRC on sales or reclaimed on purchases, no matter if the turnover exceeded the current threshold of £85k.
Limited companies and self-employed can be registered for VAT, so there is no escaping the VAT net! Conclusion The inability to charge more than metered fares puts black cab drivers in a difficult financial position, with little room to absorb the VAT cost. To maintain the iconic black cab service and support these hardworking drivers, the government must recognize their unique challenges and find a solution that preserves their businesses while upholding the principles of fair taxation.