London taxi fares will rise after the government removed a long-standing VAT loophole used by ride-hailing platforms, a decision expected to raise around £700 million a year from the Exchequer.
The change, announced by Chancellor Rachel Reeves in November’s Budget, will affect companies such as Uber and Bolt, which have previously used a tax scheme aimed at reducing their VAT bills.
Ministers say the move will level the playing field for black cab drivers in London, while Uber has warned it will lead to higher prices for passengers in the capital.
At the heart of the dispute is the tour operators’ margin scheme, which allows qualifying businesses to pay VAT only on their profit margin rather than the full value of the service. Originally designed for holiday and coach companies, the system has also been used by passenger boarding platforms.
According to the Ministry of Finance, this reduces the effective VAT rate paid by some operators to less than 4%, compared to an average of 20%. Under the new rules, providers of private hire cars and taxis will be excluded from the system.
The government called the move the end of an “illegal” tax benefit, while critics called it a new “taxi tax.”
The impact will be felt most strongly in London due to the rules put in place by Transport for London, which require ride-hailing firms to act as principals in the trade rather than as booking agents.
Apart from the capital, Uber moved to clarify that it works as an agent, which means that VAT is charged only on the commission it earns, the drivers are considered as suppliers of transport services. Most drivers fall under the VAT registration threshold, which limits their overall tax exposure.
That structure is not permitted in London, leaving operators exposed to VAT on the full payment.
Reeves said: “We are putting the brakes on the abuse of the tax system to protect everyday commuters.” This £700 million a year increase will help us reduce the cost of living, reduce waiting lists and reduce debt and borrowing.”
Steve McNamara, general secretary of the Association of Licensed Taxi Drivers, welcomed the change, which he called a “historic step for fairness and integrity”.
“For too long, drivers and small operators who pay the full 20% VAT have had to compete with online minicab firms that benefit from a niche tax system,” he said.
Uber, however, warned that the move would have unintended consequences. Andrew Brem, head of Uber UK, previously said the change “will mean higher prices for London riders, and less work for drivers, at a time when people are already struggling with the cost of living”.
He also criticized the creation of a two-tier system, where trips to London are taxed differently than those elsewhere in the UK.
With fares expected to rise and political pressure mounting on the cost of living, the closing of the VAT loophole is set to become yet another twist in the ongoing battle between the government, economic platforms and traditional taxi drivers.
