VAT charges on taxi fares? High Court siding with Uber could impact taxi companies

In February 2021, the Supreme Court ruled that UK-based Uber drivers were workers rather than self-employed, altering the company’s tax obligations.

Fast-forward to July 2023, and Uber has won a case at the High Court, meaning other taxi companies could soon be subject to the same obligations.

Additionally, experts have suggested these tax obligations could be backdated for taxi companies as they were for Uber.

This means taxi companies may have to raise prices to cover the extra costs, potentially driving away customers and leading to financial issues for the companies later. If the charges are backdated, some taxi companies might struggle to pay what could be a large outstanding tax bill.

The 2021 ruling and ‘booking agent’ vs ‘transport provider’

As stated, the 2021 ruling classed Uber drivers as workers rather than self-employed contractors, entitling them to a minimum wage and holiday pay.

Consequently, Uber, previously a ‘booking agent’, using drivers as contractors, became a ‘transport provider’ in the eyes of HM Revenue & Customs (HMRC). This change added, among other things, tax obligations. One of these is that the company pays Value Added Tax (VAT) on fares – something the app added to bookings in March 2022, leading to a rise in prices.

This year, Uber went to the High Court, insisting rival ride-hailing companies should be subject to the same conditions. With Uber emerging from this ruling victorious, those rival companies may have to add VAT to their fares.

In Uber’s case, these VAT requirements were backdated, and the company had to pay £615m.

What are the potential consequences for taxi companies?

With these potential new tax obligations, taxi firms could face adding a 20% VAT surcharge to subsequent bookings or fares and, if Uber’s case is exemplary of the changes, backdate it to innumerable historic bookings.

With the cost-of-living crisis still squeezing belts and budgets, such a price rise could deter people from making such bookings in favour of cheaper alternatives or force customers to change their habits (using their private vehicles or public transport).

For taxi companies, this could result in the following:

• Increased operating costs
  Taxi companies raise their prices to cover the additional VAT, potentially driving away customers and leading to a reduction in takings.
• Value Added Tax arrears
  If backdated, the subsequent VAT bills could leave taxi firms unable to pay.

HMRC take non-payment of VAT extremely seriously and won’t hesitate to enforce debt recovery action on a company that doesn’t pay on time.

What if your company can’t pay its VAT bill?

How we can help taxi companies that can’t repay VAT bills to HMRC

If you’re the director of a taxi firm, and the prospect of paying VAT on top of your current liabilities is giving you sleepless nights, know that help is at hand.

We can provide free, impartial, confidential advice with no obligation. Speak to us, and we can guide you towards the best solution for your taxi company.

That solution could be one of the following:

• Repay HMRC in affordable instalments
  If your company was profitable but the HMRC debt risks its financial stability, you could apply for a Time to Pay Arrangement (TTP). TTPs allow companies to repay outstanding liabilities to HMRC in tailored, affordable instalments. This can include corporation tax, PAYE/NI or VAT. These arrangements last either 6 or 12 months but may last longer if there is a realistic prospect the debt will be repaid.
  More on Time to Pay Arrangement
• Formal repayment plan for company debts
  If your taxi firm has other debts outside its VAT bill, the company can apply for a Company Voluntary Arrangement (CVA). These formal repayment arrangements allow insolvent companies to repay their unsecured debts in monthly instalments at a tailored, affordable rate. They enable the company to continue trading while repaying and will pause creditor pressure for the arrangement’s duration. HMRC-related debts, including outstanding VAT, can be included in a CVA if HMRC approves it.
  More on Company Voluntary Arrangements (CVAs)
• Restructuring the company through administration
  If more substantial restructuring could return your taxi firm to a profitable state, we may recommend administration. Here, the IP will assess the company and decide which parts can be restructured to a profitable state, with the rest sold off.
  More on company administration
• Closing the company through liquidation
  If the taxi company’s debts are of such a level that recovery isn’t practical or achievable, closing that company in an orderly manner might be the best option. In this case, the company can close through a Creditors Voluntary Liquidation (CVL). This process draws a line under the company’s debt, ending its operations. Doing so may generate a better return to creditors than if HMRC were to wind the company up through compulsory liquidation.
  More on Creditors Voluntary Liquidation (CVL)
• Purchasing the old company’s assets and starting again
  Depending on the taxi firm’s circumstances, the directors may be able to repurchase some of the old company’s assets at market value and subsequently use them in a new limited company. This practice is sometimes called ‘phoenixing’ through a pre-pack liquidation process. While this can be controversial, it has benefits when used appropriately.
  More on pre-pack liquidation

Summary

Following a series of legal proceedings, Uber has had to classify its drivers as employees rather than contractors. Now, there’s a possibility that other ride-hailing taxi companies might have to follow suit and add VAT to current bookings, potentially having to backdate it onto historic bookings too.

This extra cost and liability to HMRC could push some taxi companies into insolvency. If you’re the director of a taxi firm and you’re worried these new liabilities will push your company into insolvency, you should speak to us for free, impartial, confidential advice with no obligation. Depending on your company’s circumstances, you may have several options to relieve the debts. Repaying the debts in instalments, either through a Time to Pay Arrangement to HMRC or as part of a larger, formal Company Voluntary Arrangement (CVA), could be a viable solution. If the debts are more severe, restructuring through an administration could be an option, or if the debts are of such a level that recovery isn’t feasible, the company can close voluntarily through a Creditors Voluntary Liquidation (CVL) and draw a line under the debts.