VAT in the private hire industry can be difficult to understand without context. Over the years, I have worked in different environments and over that time, VAT has made more sense. When I first joined the private hire industry, I worked at a town-centre office. It was old-fashioned. A receptionist would take bookings over the telephone and pass them to drivers using a two-way radio. The drivers made money by collecting fares. The operator (or owner) made their money by charging a weekly fee to the drivers, otherwise known as a Settle (or circuit fee).

A private hire office can easily generate over £500,000 a year in fares. In most businesses, the government would demand an additional 20% in VAT (or sales tax). However, when the money goes directly to the drivers, it is considered their turnover. Only the ‘Settle’ is a consideration for taxation. So, ten drivers paying £100 per week each, means a total income for the private hire firm of (10 x £100 or) £1,000 a week. Over 52 weeks (52 x £1,000) this is only £52,000 a year. This is below the current VAT threshold of £90,000 so there is no additional tax requirement. In this scenario, the passengers transact with the drivers and the operator never receives the fare.

Principal

With the development of technology, things have changed. An operator can now collect fares through their app. Instead of a Settle, the operator can now deduct a commission from each driver. So, if the total amount collected in a year is £500,000, it is more than the threshold of £90,000. This means adding 20% tax before paying it to the government. For the business to survive, it would ultimately need to collect £500,000 in fares plus £100,000 in tax. This arrangement is known as ‘Principal’ because the private hire firm collects all the money.

Agent

After a Court Ruling in February 2021, Uber were viewed as ‘Principal’ and in the eyes of the law, they had to charge VAT at 20% from March 2022. Uber were immediately at a disadvantage because of this. In retaliation, they launched a court case of their own and tried to force all operators to charge VAT. When their case arrived at court however, other operators successfully argued they were not ‘Principal’ and instead, they were ‘Agents’. And as Agent, they could use the ‘Tour Operators Margin Scheme’ or TOMS which considered their turnover in a different way.

Principal vs Agent

Where an operator is an Agent, they could still have a £500,000 annual turnover and they could also take payments through their app. The difference in this scenario is that the agent takes commission and argues the commission is their only consideration for VAT (like the old-fashioned Settle). For example, if their commission is 19% on £500,000, (500,000 x 0.19) it is £95,000 a year. This is above the threshold of VAT so 20% tax would apply. In contrast to Uber, the tax on £95,000 is £19,000 per year. Compared to the Principal model, the Agent saves their consumers £81,000 a year in tax.

Just to show a comparison, if a journey is £50, the traditional company who accept cash payment in the vehicle still charge £50 in total.

If payment is through an app to a Principal operator, it is £50 + 20%VAT (at £10). The overall cost is £60.

If payment is through an app to an Agent, it is £50 plus the ‘VAT on the commission’. So, if the commission is 19% of £50 (or £9.50) the VAT component is now 20% of the £9.50 (9.5 x 0.2) or £1.90. Therefore, the final cost to the customer is £51.90.

The Owner Driver

For a consumer, an additional 20% in tax on top of their journey is expensive. Looking at business users however, the tax they pay is reclaimable. For this reason, DrivenByQ focus on business customers. From inception, we knew VAT in the private hire industry would cause issues if we didn’t get it right. As owner-drivers, there is no getting away from the fact we are Principal. For other companies with owner drivers, if they do not take enough time to understand VAT, it is only a matter of time before they encounter serious consequences.