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Taxis and hire cars
VAT liability of fares. Zero-rating of domestic passenger transport does not apply if the vehicle is designed to carry less than ten passengers. Taxi and hire car fares are, therefore, standard-rated and if the business provider is registrable for VAT, it must charge VAT to its customers. Extra charges for baggage, waiting time, etc are also standard-rated as are referral fees from other taxi businesses. Tips and gratuities given voluntarily are not payments for supplies and are outside the scope of VAT. VAT due is calculated by multiplying the fares, including extras, by the VAT fraction. See 47.2 output tax.
Invoices. Registered persons must issue VAT invoices to any customer who asks for one. See 40 invoices.
Types of business and VAT consequences.
(a) Independent self-employed drivers. If a driver has purchased or rented his own vehicle and operates it on a self-employed basis, he will normally be in business on his own account and will be making taxable supplies in the form of
● transport supplied direct to his own passengers; and/or
● services to another taxi business where he supplies them under a contract for services.
Where the driver supplies transport to his own passengers, he may use the agency services of a taxi business (see (b)(iii) below) or a taxi association (see below) to obtain customers. If, however, he drives for a taxi or private hire business as its employee (see (b)(i) below), he is not considered to be in business for VAT purposes.
A self-employed driver must register for VAT if making taxable supplies where the full amount he is paid for those supplies exceeds the VAT registration threshold. To calculate this, any amounts, such as vehicle and radio rentals or agency charges, deducted by a taxi firm must be added back to the amounts actually received.
(b) Businesses which engage drivers. This includes all types of business, whether sole proprietorship, partnership or limited company. There are three common scenarios for who is supplying the taxi and hire car services to the customers.
(i) Drivers are employees of a cab business. Where a cab business employs staff to drive its taxis or hire cars, the business makes the supplies to the customers and must account for output tax on
● the full amount payable by customers before deducting any payments made to drivers;
● any fares the sole proprietor, director or partner, as the case may be, receives if he drives for the firm;
● the full fares payable by passengers even if the work is sub-contracted to an independent business or owner driver; and
● any referral fee received from other taxi businesses.
The drivers are not considered to be in business for VAT purposes. Any money retained by the drivers is outside the scope of VAT as remuneration for their services as employees.
(ii) Drivers are self-employed and provide their services to a cab business. The cab business will usually own the vehicles and bear expenses relating to them. Typically, there are more drivers than vehicles and the firm has to exercise control over the drivers to ensure that it is adequately covered at all times. The cab business is buying in the services of drivers and selling the taxi transport on to the final customer as principal. The cab firm must account for output tax as in (i) above. Monies retained by the drivers are consideration for a supply of services by themselves to the cab business under a contract for services (see (a) above).
(iii) Drivers are self-employed and provide their services directly to the customers. The drivers will usually own their own vehicles and bear expenses relating to them. The cab business or taxi association acts as agent for the drivers, usually providing them with services such as radio hire, booking and support services in return for a commission or fee. This is a standard-rated supply of services by the business or association to the drivers. The business or association must register for VAT if the total of all such charges and any other supplies it makes exceeds the VAT registration limit. Individual drivers need only account for output tax if their supplies exceeds the VAT registration limits (see (a) above).
For cases where self-employed drivers were held to supply their services to the cab firm under (b)(ii) above, see Hamiltax (VTD 8948) (TVC 61.221) and Knowles (t/a Rainbow Taxis) (VTD 13913) (TVC 61.222). For cases where the final supply to the customer was held to be by the drivers under (b)(iii) above, see Triumph and Albany Car Service (VTD 977, VTD 1004) (TVC 61.225) and Carless v C & E Commrs, QB [1993] STC 632 (TVC 61.227).
Fees paid to controllers. In Home Or Away Ltd (VTD 18195) (TVC 61.233) a company engaged staff (which it treated as self-employed) to act as controllers. Drivers paid 10% of their fares directly to the controllers as fees. The tribunal held that, on the evidence, although the fees were paid directly to the controllers as a matter of convenience, they were paid for a supply by the company of the services of the controllers to the drivers.
Account work. Most taxi and hire car businesses engage in cash work (where customers pay cash to the driver upon completion of the journey) and account work (where regular customers, usually businesses, are allowed to settle their bills periodically). In most cases there will be no difference between the operation of the two types of business, ie both will fall within the same category under (b)(i)–(iii) above and VAT must be accounted for as indicated under the relevant category. Where both cash and account work falls within (b)(iii) above, invoices raised by the business to account customers should itemise separately
● fares collected on behalf of drivers (with the addition of VAT if the driver is registered); and
● any administration or similar charge by the business (with the addition of VAT if the business is registered).
However, there may be a genuine difference between the treatment of cash and account work with the business acting as agent for cash work under (b)(iii) above but principal for account work under (b)(ii) above. If such arrangements are adopted, the business must satisfy HMRC that
● the arrangements are reflected in the written terms agreed with the drivers; and
● there is a genuine difference in the operation of the cash and account sides of the business.
If a business operates as an agent for cash work and a principal for account work, it must still account for VAT at the standard rate on the full charge to the drivers for the rental of vehicles, radios or other services supplied to them. This applies even if the charge is
● offset when calculating the rate due to the drivers for account work they perform; or
● deducted before paying them for account journeys.
See RJ and CA Blanks (VTD 14099) (TVC 66.112).
The basis of payment (eg where drivers are paid a fixed hourly rate for account work but their payment for cash work is directly related to takings) could be one indication of a contractual distinction between cash and account work. See Triumph and Albany Car Service and Carless above for cases where the cash and account customers were held not to be distinguishable; and Camberwell Cars Ltd (VTD 10178) (TVC 61.231) and A Hussain (t/a Crossleys Private Hire Cars) (VTD 16194) (TVC 61.226) where the tribunal held there was a real distinction between cash and account work.
Taxi associations. Some independent and self-employed taxi drivers form taxi associations to provide services to the individual driver members. These services can include
● operation of a booking office and radio link;
● hire of radios; and
● provision of rest facilities.
Supplies to members are always standard-rated whether they pay for them by periodic subscription or by deduction/offset from fares collected on the members' behalf. Taxi associations must be registered for VAT if the total of all such charges, together with the total charges for any other supplies they make, exceed the VAT registration threshold. Additional supplies can include an administration fee for services supplied to customers (eg providing a breakdown or analysis of journeys made).
Purchases of motor vehicles. VAT can be reclaimed on the purchase of a motor car if
● it is a qualifying motor car; and
● it is intended primarily to be used for letting on hire with a driver for the purpose of carrying passengers.
A qualifying motor car is generally either a new car or a used car where all previous owners were able to reclaim input on their purchases. See 45.3 motor cars for further details.
Fuel. Input tax is reclaimable on fuel bought for use in taxis or hire-cars by the proprietor and, for the time being at least, employees of a business. However, if the business funds private motoring, a scale charge is payable.
See 45.10-45.18 motor cars for motor expenses generally including fuel and private motoring.
Sales of taxis and hire cars. If a taxi or hire car is sold on which input tax has been previously reclaimed, VAT must be accounted for on the full selling price. If no input tax has been previously reclaimed (eg because it was purchased under the second-hand scheme or from a private individual) it may be sold under the second-hand margin scheme provided the conditions for the scheme can be met. VAT need then only be accounted for on the excess, if any, of the sales proceeds over cost. See 61 second-hand goods.
Where a vehicle is sold with a local authority hackney carriage licence plate, there is a single supply of goods (ie a licensed taxi). The full selling price is the total amount charged for the vehicle and licence plate. Licence fees paid to a local authority to operate a taxi cab are treated as separate supplies of services and cannot be included in the purchase price of a vehicle when working out the VAT due on sale under the second-hand margin scheme.
Where a taxi or hire car is exchanged or traded on the purchase of a replacement vehicle, VAT must be accounted for in the same way as if it had been sold at a price equal to the exchange or trade-in allowance received.
Sale of business as going concern. If a taxi or car hire business is sold as a going concern and certain conditions are met, there is no taxable supply for VAT purposes and no VAT liability on the assets sold, including any taxis or hire cars included in the price. See 8.10 business. To be treated as such a sale, the transaction must include more than just the sale of a vehicle (eg the rights to a radio network, goodwill, lists of customers).
(VAT Notice 700/25/02).
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