UK’s New “Taxi Tax”: What the VAT Crackdown on Uber and Bolt Means for Drivers and Passengers

The UK’s Autumn Budget 2025 introduced a major tax change for the private‑hire sector. Since 2 January 2026, large ride‑hailing operators in London, such as Uber and Bolt, can no longer apply the Tour Operators’ Margin Scheme (TOMS) to their fares. This new taxi tax means they must charge 20% VAT on the full fare, not just on their margin. HM Treasury claims that this move will eliminate a tax loophole, establish fair competition for black taxi drivers, and generate approximately £700 million in revenue.

This article looks at why private hire VAT changes were introduced, how they work, and what they mean for passengers, drivers, and operators. It also explains how Apex Accountants can help your business comply with the new rules.

Why Was the Tour Operators’ Margin Scheme Being Used?

The Tour Operators’ Margin Scheme is a special VAT scheme designed for tour operators selling travel packages. It allows companies to pay VAT only on their profit margin rather than on the full cost of the trip, often reducing the effective VAT rate to around 4%. In recent years some large ride‑hailing firms applied the scheme to domestic private‑hire journeys. This meant they charged VAT only on their commission after paying drivers and not on the entire fare.

In London, courts have ruled that ride‑hailing operators act as principals in the supply of passenger transport, so they must collect VAT on the full fare. Outside London, operators could continue acting as agents, accounting for VAT only on their commission. 

The Upper Tribunal ruled in March 2025 that operators such as Bolt could use TOMS. HMRC strongly disagreed, arguing that TOMS was never intended for domestic taxi services, and it appealed. To remove the uncertainty, the Autumn Budget legislated to exclude taxi and private‑hire journeys from TOMS.

What is the change in VAT on Taxi Fares in the UK from January 2026?

The policy paper “Private Hire Vehicle Operators and the Change in Legislation for the Tour Operators’ Margin Scheme” sets out the details. The key points of Reeves’ private hire VAT are:

• Exclusion from TOMS – Section 53 of the VAT Act 1994 is amended to exclude suppliers of taxi and private-hire journeys from being “tour operators” for VAT purposes, except when the journey is supplied as part of a wider travel package.
  
• Effective date – The VAT on taxi fares UK rule applies to journeys from 2 January 2026.
  
• Scope: The change affects businesses that buy in and resell taxi or private hire journeys as principals or as agents acting in their names. Journeys where drivers provide the service directly as disclosed agents are unaffected.
  
• Exceptions – TOMS remains available when a taxi or mini‑cab ride is supplied in conjunction with accommodation or another principal travel service, such as part of a holiday package.
  
• Exchequer impact – HM Treasury expects the measure to raise around £190 million in 2025‑26 and £725 million in 2026‑27, tapering slightly in later years.

The Impact Of London Taxi VAT Increase

In London, private‑hire operators are legally required to act as principals when supplying journeys to passengers. Acting as principal means the company sells the entire transport service and must account for VAT on the full fare, not just its commission. Now that the new VAT rules for London taxis have taken effect, ride‑hailing firms in London must charge 20% VAT on each fare, increasing prices.

Outside London, regulations still allow operators to act as agents. If the driver is the supplier, the operator charges VAT only on its commission, and the driver pays VAT on their earnings. Most self‑employed drivers earn less than the £90,000 VAT registration threshold, so they do not charge VAT. For this reason, the “taxi tax” will mainly affect rides booked in London.

Uber has responded by rewriting driver contracts outside London so that the company acts as an agent, meaning VAT continues to apply only to its commission. As per recent reports, the new contracts make drivers contract directly with passengers, leaving Uber to add VAT solely to its commission. Because drivers seldom reach the VAT threshold, most fares outside London will avoid the 20% tax.

Impact on Fares and the Cost of Living

Expected Fare Increases

Official documents do not specify exactly how much fares will rise, but industry estimates provide a guide:

• It is suggested that adding 20% VAT could add £2–£3 to a £12 journey.
• Insurance broker INSHUR estimates that a £20 fare may increase to £24.
• Uber’s UK general manager, Andrew Brem, warns that the government’s action will “mean higher prices for passengers in London and less work for drivers.”
  

These estimates imply that passengers could see fare increases of roughly 15–20%. A survey indicates that 70% of passengers would reduce or stop using private‑hire services if fares increased by 20%. This suggests the VAT on taxi fares in the UK may have a noticeable effect on demand, particularly for short trips.

Reeves Private Hire VAT Impact on Drivers and Operators

• Drivers’ earnings – Many drivers are self-employed and earn less than the VAT threshold. If the operator acts as an agent, drivers will not charge VAT, and their fares should remain similar. However, in London, the operator must act as principal, meaning the fares will include VAT. Operators may choose to share the cost with drivers, potentially reducing earnings.
  
• Reduced demand – Higher fares could lead to fewer trips, particularly outside peak hours. Lower utilisation could squeeze drivers’ incomes.
  
• Business models – Large operators like Uber and Bolt are revising their business models. Outside London they are switching to an agency model to avoid charging VAT on full fares. In London, operators may still look for efficiency gains or promotional pricing to remain competitive.
  
• Small operators and black cabs – Smaller taxi and private‑hire firms that already pay full VAT or operate below the threshold are largely unaffected. The Licensed Taxi Drivers Association welcomed the private hire VAT changes as a “landmark step for fairness”, arguing they end the competitive advantage enjoyed by ride-hailing platforms.
  

Wider Impacts of Reeves’ Private Hire VAT

The Treasury expects the reform to raise around £700 million per year. Officials say the revenue will help fund priorities such as cutting the cost of living, reducing waiting lists and reducing national debt. While black cab drivers see the measure as levelling the playing field, hospitality and transport groups warn that higher fares could deter people from travelling for leisure or work. Some commentators argue that a lower VAT rate on transport would have encouraged mobility and economic activity. The debate shows the challenge of balancing tax fairness with affordability.

How We Can Help Navigate New Taxi Tax in UK

Apex Accountants understands how new tax rules can disrupt your business. Our team of VAT specialists can help private hire operators, taxi firms, and self-employed drivers navigate the 2026 VAT changes. We offer:

• VAT registration and compliance – Assess whether you must register, prepare VAT returns and ensure you collect the correct tax.
  
• Business model reviews – Clarify whether you should operate as an agent or principal, calculate the impact on your margins and draft clear contracts.
  
• Accounting software setup – Integrate digital tools to automate VAT calculations and recordkeeping.
  
• Training and support – Provide guidance on invoicing, VAT thresholds and claiming input tax to maximise deductions.
  
• Industry updates – Keep you informed about further changes to licensing, HMRC guidance and relevant court decisions.
  

Conclusion

The government’s decision to close the TOMS loophole marks a major shift in VAT on online cab companies. Since 2 January 2026, large operators in London must charge 20% VAT on the full fare, bringing their tax treatment closer to that of black cabs. Outside London, operators can still act as agents, so many fares remain VAT‑free. Passengers in the capital should expect fare increases of around 15–20%, while drivers and operators must assess how the change affects their earnings and compliance obligations.

With proper planning and professional advice, businesses can adapt to the new landscape. For tailored guidance on VAT, tax planning and compliance, Apex Accountants is here to help you navigate the roads ahead.

Frequently Asked Questions About VAT for Online Cab Companies

What is the Tour Operators’ Margin Scheme (TOMS)?

The TOMS is a simplified VAT scheme for travel companies that buy and resell travel services. It allows firms to pay VAT on their margin (profit) rather than the full selling price. It was designed for travel packages such as holidays. Under TOMS, operators normally pay an effective VAT rate of around 4%, compared with the standard 20%.

Why were ride‑hailing companies using TOMS?

Following court rulings, some private‑hire companies acting as principals argued that TOMS applied to domestic journeys, allowing them to pay VAT only on their commission. HMRC disagreed, stating that TOMS was never intended for domestic taxi services. The Upper Tribunal ruled in March 2025 that TOMS could apply to ride‑hailing services, prompting HM Treasury to legislate.

When did the new VAT rule start?

The exclusion from TOMS applies to journeys supplied on or after 2 January 2026. Since that date has now passed, all affected journeys are subject to the new rules.

Who pays the VAT under the new rules?

If the private‑hire operator acts as a principal, it charges VAT on the full fare. In London, it is mandatory. If the operator is an agent, only the commission is taxed, and the driver pays VAT on their earnings. Many trips outside of London will remain VAT-free because the majority of drivers make less than the £90,000 VAT registration threshold.

Will fares outside London go up?

Outside London, operators may continue using an agency model and pay VAT only on their commission. If operators adopt this model, fares should not increase unless the driver is VAT‑registered. However, regional authorities could tighten their licensing rules, so passengers should verify their local operator’s pricing.

Are there any exceptions?

Yes. The new legislation still allows TOMS to apply when the taxi journey is supplied as part of a wider travel package – for example, a hotel booking that includes a transfer. In these cases, the ride is considered ancillary to the main travel service.

How can drivers and operators prepare?

• Review contracts and business models – Determine whether you will act as principal or agent for each type of journey.
  
• Monitor earnings – Self‑employed drivers should track their turnover to see if it approaches the £90,000 VAT threshold. Exceeding it triggers compulsory registration.
  
• Update booking systems – Ensure your software applies the correct VAT rate from 2 January 2026.
  
• Communicate with customers – Be transparent about price changes to avoid confusion.
  

Seek professional advice – Understanding VAT rules can be complex. Working with an accountant or tax advisor can help you stay compliant and minimise costs.