Value Added Tax (VAT) is one of the UK’s most significant indirect taxes. Whether you run a business, work as a contractor, or operate in transport services such as taxis or private hire vehicles, understanding how VAT works is essential.
Recent reforms — particularly those affecting London taxi and ride-hailing services — have made VAT even more important for drivers, operators, and passengers alike. In this guide, we break down what VAT is, how the reverse charge works, and what the 2026 changes mean for the transport sector.
What Is VAT?
VAT is a consumption tax applied to most goods and services in the UK at a standard rate of 20%. It is collected by VAT-registered businesses on behalf of HM Revenue & Customs (HMRC) and paid to the government.
Here’s how it works in practice:
VAT-registered businesses charge VAT on their sales (output tax).
They can usually reclaim VAT paid on business expenses (input tax).
The difference is paid to (or reclaimed from) HMRC via VAT returns.
For many businesses, VAT is simply part of daily operations — but specific sectors, including transport, have more complex rules.
VAT Reverse Charge: What It Is and Why It Matters
The VAT reverse charge is a mechanism that shifts the responsibility for accounting for VAT from the supplier to the customer.
Instead of the supplier charging VAT:
The customer (who must be VAT-registered) accounts for the VAT themselves.
The supplier issues an invoice without VAT.
The customer declares the VAT on their VAT return as:
Output tax (VAT due)
Input tax (VAT recoverable, if eligible)
This system is common in Business-to-Business (B2B) transactions, especially:
Cross-border services
Industries with higher fraud risks
Complex supply chains
The reverse charge reduces VAT fraud and simplifies compliance where multiple suppliers are involved.
How VAT Normally Applies to Taxis and Private Hire Vehicles
Under standard VAT guidance:
Taxi and private hire fares are subject to 20% VAT if the driver or operator is VAT-registered.
Independent self-employed drivers typically make the taxable supply directly to the passenger.
Operators acting as agents (for example, booking platforms) usually charge VAT only on their commission, not the full fare — provided drivers are not VAT-registered.
However, this structure has evolved — particularly in London — due to changes in how some ride-hailing firms accounted for VAT.
The TOMS Loophole Explained
Some ride-hailing companies had been using the Tour Operators’ Margin Scheme (TOMS) — a VAT scheme originally designed for travel and holiday packages.
Under TOMS:
VAT is paid only on the profit margin, not the full price charged to customers.
Although designed for tour operators, certain private hire companies applied it to taxi journeys, significantly reducing their effective VAT rate.
New VAT Rules for London Taxis & Private Hire (From January 2026)
From 2 January 2026, the UK Government introduced legislation removing taxi and private hire journeys from eligibility under TOMS.
What Has Changed?
Taxi and private hire providers can no longer apply TOMS to standard journeys.
VAT-registered operators acting as principals must now account for VAT on the entire fare (20%), not just on their margin.
Platforms acting as disclosed agents (charging only a booking fee) continue to apply VAT only to their commission.
Why This Reform Matters
The government introduced these changes to:
Close a perceived VAT avoidance loophole.
Create a level playing field between traditional black cabs and private hire operators.
Raise an estimated £700 million annually to support public spending priorities such as healthcare and cost-of-living measures.
In the media, this reform has sometimes been described as a “taxi tax” because it may lead to higher passenger fares — particularly in London.
Impact on Drivers, Operators & Passengers
Drivers & Small Operators
Independent drivers must register for VAT if their taxable turnover exceeds the VAT threshold.
Drivers below the threshold do not need to charge VAT unless they voluntarily register.
Large Operators & Ride-Hailing Platforms
VAT-registered companies acting as principals must now account for VAT on the full fare.
This increases compliance requirements and potentially tax liability.
Passengers
Fares may increase where VAT is applied to the full journey price rather than just service fees.
The impact is expected to be most noticeable in London.
Final Thoughts
VAT remains one of the most important — and sometimes complex — aspects of doing business in the UK. Understanding how standard VAT works, when the reverse charge applies, and how sector-specific rules affect taxi and private hire services is crucial for compliance and financial planning.
With the 2026 reforms now in effect, drivers, operators, and platforms must carefully assess their VAT position to ensure they remain compliant while managing pricing and profitability effectively.
Staying informed isn’t just good practice — it’s essential for protecting your business in an evolving regulatory environment.