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Taxi firms may have to charge VAT on their services if new legislation comes to pass

New legislation may be put in place by the Government that requires taxi firms across the UK to add VAT on to their fares.

This could impact the number of people willing to use taxis as a method of transport by driving up prices during a cost-of-living crisis, subsequently impacting taxi companies’ financial situation.

Why are there new changes?

Previously, not all taxi fares were liable to have VAT paid on them.

In fact, paying VAT on any kind of ride-hailing service fare was only introduced in 2022 with Uber.

Here the Supreme Court ruled in 2021 that Uber drivers should be classed as workers, therefore, creating additional tax obligations and administration alterations to how the app works.

After this, VAT was charged on Uber rides from the beginning of March 2022 onwards. Other ride-hailing apps, such as Bolt and Freenow, also follow this legislation.

Since this ruling, though, Uber has asked that VAT should be charged on all taxi services across the country to even out the competition leading to the issue at hand.

What does this mean for taxi firms?

The biggest change for those travelling via taxi would be that their fares will increase by 20 per cent (the current top rate of VAT).

However, for taxi companies, it will change not just the way they pay tax, but also how they record and report tax. This means that they must be registered to Making Tax Digital for VAT and use software that will allow them to keep digital records and submit their online tax return.

They will now have the trouble of adding tax onto their fares – working out how much VAT should be added to each fare and adding this to every journey .

Furthermore, there is also the potential for the VAT to be backdated, as there was with Uber’s case.

Here, there will be worries from taxi companies about how much they will owe HM Revenue & Customs (HMRC) in backdated pay, which has the potential to threaten their financial stability.

How can taxi firms prepare?

The best way to prepare for these changes is by doing a number of things.

Keeping aware of the new legislation and when it will be enforced is vital to ensuring companies are following the rules.

Liaising with their accountants (or hiring an accountant if they don’t already have one) to ensure that they are paying HMRC correctly is also a beneficial thing which could be done.

Not only will an accountant be able to ensure their tax obligations are taken care of, but they can also introduce systems to taxi companies which will work out the correct amount of VAT for customers and ensure that they are not over or undercharging for their services.

If you need help with organising tax and VAT for your taxi company, please get in touch today.

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