Change to UK private hire vehicle VAT treatment could impact contracting model

The UK government has issued a public consultation (37 pages / 522 KB) with aims of understanding the potential impacts of two recent High Court judgments on private hire vehicles and their passengers.

The two judgments sought clarity on whether a licensed private hire vehicle business needs to contract directly with its passengers.

The outcome of the recent cases means that the operator is to be the ‘principal’, with direct obligations to the passenger, in private hire cases. This means a passenger essentially contracts with a private vehicle firm, such as Uber, for the duration of their journey, not with the individual driver. Most individual drivers are not subject to VAT due to being under the threshold at which it is charged, while firms will generally be above that threshold and therefore subject to VAT.

The outcome of this consultation “will likely define the preferred business model for private hire companies for the foreseeable future” with “any alternative business model which is VAT inefficient likely to struggle in a competitive marketplace”, said Bryn Reynolds, tax law expert at Pinsent Masons.

The consultation seeks to understand the potential impacts of these judgments on firms, drivers and different types of consumers following analysis carried out by the government.  The government aims to gather views on potential interventions that could help mitigate any undue negative consequences these judgments could have on the private hire sector and its passengers.

One suggestion is to create a further VAT ‘fiction’, introducing an exception to the usual rule that VAT treatment of a good or service is determined by the contractual agreement in place. A similar exception is used in relation to goods and digital services supplied through an online platform to mean the platform is deemed the supplier. However, these exceptions risk uncertainty and may create further difficulty.

Reynolds noted the potential issues, saying: “The difficulty of reconciling the legal and regulatory position with the preferred VAT outcome is going to be challenging”.

The consultation focuses on the private hire sector but may have an impact on a wider range of industries as the government look to determine the regulatory next steps

“Whilst the consultation is in a niche area of VAT, it will likely have an impact on a growing number of industries facilitated by individuals under the VAT registration threshold. This is a sizeable proportion of the economy which will continue to grow given the decision to raise the VAT registration threshold in the recent budget,” Reynolds said.

The consultation is open until 8 August, with interested parties urged to view the document and submit their responses on the official UK government website.