A significant change to the Value Added Tax (VAT) rules for the private hire and taxi industry has come into force today, creating a clear divide between traditional cabbies and major ride-hailing platforms.
What is Changing with the VAT Rules?
From 2 January 2026, suppliers of taxi and private hire vehicle (PHV) services are formally excluded from the Tour Operators' Margin Scheme (TOMS). This scheme was originally designed for tour operators and holiday coach trips, allowing them to pay VAT only on their profit margin rather than the full fare. The government's move ends the application of this scheme to everyday private hire journeys.
HM Revenue & Customs (HMRC) has long held the view that PHV supplies do not qualify for TOMS, meaning VAT was always due on the full fare. The legislation, first announced in the Autumn Budget of 2025, now puts this position "beyond doubt". The change primarily affects businesses that buy in and resell taxi journeys as a principal, or as agents acting in their own name.
A Divided Industry: Celebration vs. Criticism
The reaction from within the transport sector has been sharply contrasting. Steve McNamara, General Secretary of the Licensed Taxi Drivers' Association (LTDA), praised the government for its "decisive action". He stated the decision to apply VAT to all private hire journeys is a "landmark step for fairness and integrity".
"For too long, drivers and small operators paying the full 20% VAT have had to compete with online minicab firms benefiting from a niche tax scheme," McNamara commented, highlighting the perceived imbalance the new rules aim to correct.
In stark opposition, Uber's UK General Manager, Andrew Brem, strongly criticised the change. He pointed out that courts had previously ruled twice that TOMS did apply to operators like Uber. "This decision also establishes the absurd situation where a trip in London will be taxed at a different rate than a trip anywhere else in the UK," Brem argued, suggesting the policy creates a postcode lottery for VAT.
Key Exceptions and What It Means for Passengers
The government has clarified several important exceptions to the new rule. The change does not impact journeys where PHV or taxi operators act as a disclosed agent, or trips provided directly by a driver to a passenger, such as a street-hailed cab.
Furthermore, exclusions from TOMS will not apply where a private hire journey is supplied alongside and is ancillary to certain other 'principal' travel services. These include accommodation or specific other passenger transport services. This means traditional tour operators who include minicab transfers as part of a holiday package are unaffected.
For the average passenger, the immediate impact may not be directly visible on a receipt, but the government contends the policy will ultimately benefit the industry by creating a level playing field. The long-term effect aims to support small taxi operators and drivers who have been at a competitive disadvantage.
