Taxi fares in London are set to rise after the government decided to close a long-standing VAT loophole used by ride-hailing platforms. This decision is expected to bring in around £700 million a year to the exchequer.
The change, announced by Chancellor Rachel Reeves in the November Budget, will hit companies such as Uber and Bolt, which have previously used a tax scheme for tour operators to reduce their VAT bills.
Ministers argue the move will level the playing field for London’s black taxi drivers, while Uber has warned it will lead to higher prices for passengers in the capital.
At the heart of the dispute is tour operators’ margin scheme, which allows eligible companies to pay VAT only on their profit margin and not on the full value of a service. Originally designed for holiday and bus tour operators, the system is also used by ride-hailing platforms.
According to the Treasury, this reduced the effective VAT rate paid by some operators to just 4%, compared to the standard rate of 20%. Under the new rules, private car rental and taxi service providers will be excluded from the scheme.
The government described the move as the end of an “illegitimate” tax benefit, while critics described it as a new “taxi tax”.
The impact will be felt most acutely in London due to rules set by Transport for London, which require ride-hailing companies to act as principals rather than booking agents in transactions.
Outside the capital, Uber has clarified that it acts as an intermediary, meaning it only charges VAT on the commission it earns, treating drivers as providers of transport services. Most drivers are below the VAT registration threshold, which limits the overall tax burden.
This structure is not permitted in London, so operators are subject to VAT on the full fare.
Reeves said: “We are stopping the unlawful use of a niche tax system to protect everyday taxi drivers. The £700m a year this will raise will help us reduce the cost of living, shorten waiting lists and reduce debt and credit.”
Steve McNamara, general secretary of the Licensed Taxi Drivers Association, welcomed the change, calling it “a milestone for fairness and integrity”.
“For too long, drivers and small operators who paid the full 20% VAT have had to compete with online mini-taxi firms who benefited from a niche tax system,” he said.
However, Uber has warned that the move will have unintended consequences. Uber UK boss Andrew Brem previously said the change would mean “higher prices for passengers in London 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 journeys in London are taxed differently than elsewhere in the UK.
As fares are expected to rise and political pressure on the cost of living increases, closing the VAT gap is likely to become another flashpoint in the ongoing battle between the government, gig economy platforms and traditional taxi companies.
