A significant shift in car tax rules has come into force, directly impacting the cost and operation of taxi and private hire services across the UK. From Friday, January 2, 2026, suppliers of these services will be excluded from a specific VAT scheme, a move hailed by some as a victory for fairness but condemned by others as creating an "absurd" postcode lottery.
What is Changing with the VAT Rules?
The government has enacted legislation to formally exclude private hire vehicle and taxi journey suppliers from the Tour Operators' Margin Scheme (TOMS). This niche scheme had allowed some operators, predominantly larger app-based firms, to account for VAT only on their profit margin rather than the full fare. The Treasury's position, now made law, is that VAT at the standard 20% rate is due on the full fare for most private hire journeys.
This change primarily affects businesses that buy in and resell taxi journeys as a principal or as an agent in their own name. The government clarified that it does not impact traditional street-hailed taxi journeys or situations where a driver contracts directly with a passenger.
Industry Reaction: Fairness vs. "Absurd" Outcome
The reform has sparked sharply contrasting reactions from key industry figures. Steve McNamara, General Secretary of the Licensed Taxi Drivers Association (LTDA), strongly praised the Labour government and Chancellor Rachel Reeves for their "decisive action".
"The Government's decision to apply VAT to all private hire journeys is a landmark step for fairness and integrity in our industry," McNamara stated. "For too long, drivers and small operators paying the full 20 per cent VAT have had to compete with online minicab firms benefiting from a niche tax scheme."
In stark opposition, Andrew Brem, General Manager of Uber UK, criticised the move. He pointed out that courts had previously ruled the TOMS did apply to operators like Uber. "This decision also establishes the absurd situation where a trip in London will be taxed at a different rate than a trip anywhere else in the UK," Brem argued, highlighting a potential inconsistency in application.
Exceptions and Long-Term Implications
The new rules contain specific exceptions. The exclusion from TOMS does not apply where a private hire journey is supplied as part of, and is ancillary to, a broader travel package including accommodation or other passenger transport. This means traditional tour operators including minicab transfers in holiday packages are unaffected.
The policy, announced in the Autumn Budget of 2025, was introduced to provide legal certainty after years of dispute. Her Majesty's Revenue and Customs (HMRC) had long maintained its view that TOMS should not apply to these services. This legislative change now puts that position beyond doubt, potentially levelling the playing field but also raising operational costs for affected private hire operators, which may influence future fare prices for passengers.
