Is There VAT on Taxi Fares? - Passengers and Businesses Guide

What is VAT on Taxi Fares?

In the UK, the standard rate of VAT (currently 20%) generally applies to most services, including taxi fares. This means that when you take a taxi or private hire car, you might be charged VAT on the fare, along with any extra charges such as baggage fees, waiting time, or fuel surcharges. For example, if a taxi ride includes a baggage fee, both the fare and the baggage fee will typically be subject to VAT.
There are exceptions, though. For instance, gratuities and tips that passengers give freely to drivers are not taxed under VAT. These are gifts, and as such, they do not form the price for the service and fall outside VAT regulations.

How VAT Applies to Self-Employed Drivers

If you’re a self-employed driver (an owner-driver), the VAT rules are slightly different compared to businesses that operate fleets of taxis. Self-employed drivers must charge VAT on the services they provide, but this only applies if they are VAT-registered.
The VAT limit for independent drivers is £85,000. What this implies is, if your income is over this amount annually, you will need to register for VAT and charge your fares VAT. If your income is below that, you don't need to charge VAT on your cab fares.

Taxi Businesses and VAT

For businesses with more than one taxi, VAT considerations could be more complex. Taxi businesses need to account for VAT on the overall fare received from customers before any deduction of driver remunerations. Irrespective of whether you are a sole trader or business, the VAT must be included on the payment made by customers even if the fare eventually gets split between the company and the driver.
Taxi firms usually do two types of business: cash business (where the customer pays the driver) and account business (where firms or institutions are billed on a regular basis). The treatment of VAT may vary depending on whether or not the firm is a principal or agent in the transaction.
Where the company is an agency, VAT is charged on the fares paid by customers only if the driver is VAT-registered. When the driver is not VAT-registered, there is no VAT charged on the fare.

How VAT Impacts Taxi Associations

Taxi associations that offer services to independent drivers like booking offices, radio links, and rest areas are taxable under VAT as well. Once the association's income exceeds the VAT threshold, it is required to levy VAT on services rendered to its members, e.g., for booking and administrative services. These services are levied under VAT always at normal rate.

VAT on Selling Taxis or Private Hire Cars

When you are selling a private hire car or taxi, VAT rules vary depending on whether you're selling the business or just the vehicle. When selling the business as a whole as a going concern (i.e., selling the business), VAT is not payable. But if you sell individual taxis or vehicles and have previously reclaimed VAT on their original purchase, you will have to charge VAT on the entire selling price.
In other cases, vehicles purchased from private individuals might be eligible for the second-hand margin scheme, on which VAT is charged in a different way on used vehicles.

Future Changes to VAT on Taxi Fares

In 2025, there will be big changes to the VAT rules for taxis in the UK. After a public consultation in April 2024, the UK government has determined that all taxi charges must include VAT. This new law applies to all taxi companies, no matter how big they are or whether they are registered for VAT. This means that all taxi drivers will now have to charge VAT on fares.
Because of this, travelers will probably have to pay an extra 20% on their taxi fares. This rise will directly affect both passengers and smaller taxi firms. Tourists who come to the UK may see a big hike in the cost of using a cab, which might make taxis less economical for short trips. For small cab companies, adjusting to the new VAT system could be a financial burden because they have to change how they do business and set prices to follow the rules. These businesses may have to pay more to run their businesses because of this change in the VAT system. This could mean even higher charges for passengers.

How Passengers Can Manage VAT Costs

If you’re a passenger, especially for business trips, it’s important to be aware of whether VAT is included in your taxi fare. One simple way to find out is by requesting a VAT receipt. A valid VAT receipt will clearly show the amount of VAT included in your fare, and it’s essential for businesses to keep these receipts when claiming VAT back.
Passengers would also want to compare the taxi fares from different companies, as some of them charge VAT while others do not, depending on whether the company or driver is registered for VAT.

The Effect of VAT on Fare Prices

Of late, Transport for London (TfL) has announced an 8.92% increase in certain taxi fares from April 2024, mostly on the grounds of rises in operating costs. Coupled with the prospect of VAT regulations changes, taxi fares can even be more costly to passengers. It is imperative for regular users of taxis to keep themselves updated about such situations and be ready to make adjustments in their travel costs accordingly.

Managing VAT on Taxi Fares

Taxi fares are complicated sometimes, but having a basic understanding of how you pay VAT will make you more able to manage your travel costs. Whether you are a traveler who wishes to budget your fare or a business who wishes to reclaim VAT on a business trip, awareness is key. Always request a VAT receipt if you travel on business, ask for quotes from different taxi providers, and keep an eye out for potential price rises as VAT law changes.
Since changes are anticipated in 2024, both passengers and taxi companies should be kept informed regarding how VAT could influence your taxi fares. This way, you can make better decisions and have better control over your travel costs.