London taxi fares are set to rise after the government moved to close a long-standing VAT loophole used by ride-hailing platforms, a decision expected to raise around £700 million a year for the Exchequer.
The change, announced by Chancellor Rachel Reeves in November’s Budget, will hit companies such as Uber and Bolt, which have previously used a tax scheme intended for tour operators to reduce their VAT bills.
Ministers argue the move will level the playing field for London’s black cab drivers, while Uber has warned it will result in higher prices for passengers in the capital.
At the centre of the dispute is the tour operators’ margin scheme, which allows eligible businesses to pay VAT only on their profit margin rather than the full value of a service. Originally designed for holiday and coach tour companies, the scheme has also been used by ride-hailing platforms.
According to the Treasury, this reduced the effective VAT rate paid by some operators to as little as 4%, compared with the standard 20% rate. Under the new rules, suppliers of private hire vehicle and taxi services will be excluded from the scheme.
The government has branded the move the end of an “illegitimate” tax advantage, while critics have dubbed it a new “taxi tax”.
The impact will be felt most sharply in London because of rules set by Transport for London, which require ride-hailing firms to act as the principal in transactions rather than as booking agents.
Outside the capital, Uber has moved to clarify that it operates as an agent, meaning VAT is only charged on the commission it earns, with drivers treated as the supplier of transport services. Most drivers fall below the VAT registration threshold, limiting overall tax exposure.
That structure is not permitted in London, leaving operators exposed to VAT on the full fare.
Reeves said: “We’re putting the brakes on the illegitimate use of a niche tax scheme to protect everyday cabbies. The £700 million a year this raises will help us cut the cost of living, cut waiting lists and cut debt and borrowing.”
Steve McNamara, general secretary of the Licensed Taxi Drivers Association, welcomed the change, calling it “a landmark step for fairness and integrity”.
“For too long, drivers and small operators paying the full 20% VAT have had to compete with online minicab firms benefiting from a niche tax scheme,” he said.
Uber, however, has warned the move will have unintended consequences. Andrew Brem, head of Uber UK, previously said the change would “mean higher prices for passengers in London, and less work for drivers, at a time when people are already struggling with the cost of living”.
He also criticised the creation of a two-tier system, where journeys in London are taxed differently from those elsewhere in the UK.
With fares expected to rise and political pressure mounting on the cost of living, the closure of the VAT loophole is set to become another flashpoint in the ongoing battle between government, gig-economy platforms and traditional taxi operators.