The Taxi Tax — 20% VAT on every private hire fare
On 2 January 2026, the government introduced full 20% VAT on all private hire fares, abolishing the Tour Operators Margin Scheme. A survey found 70% of passengers said they would reduce or stop using PHVs as a result — destroying demand and driver earnings simultaneously.
What changed and why it matters
Until January 2026, private hire platforms operated under the Tour Operators Margin Scheme (TOMS), which meant VAT was only applied to the platform’s margin — not the full fare. From 2 January 2026, the government abolished TOMS for PHV operators and introduced full 20% VAT on every fare.
The timing was significant. The change came eight weeks before the Iran conflict began — meaning drivers immediately faced both a 20% passenger fare increase and, weeks later, a 29p per litre fuel price spike. Both costs land on drivers. The government collects tax at both ends.
The demand impact
A survey by The Taxi Insurer found 70% of passengers said they would reduce or stop using PHVs entirely as a result of the fare increase. In practice, this means fewer trips and lower driver earnings — not a static reduction in take-home pay, but a compounding one as passenger volume falls.
A typical £24 fare now costs the passenger approximately £28.80 with VAT applied. For price-sensitive journeys — airport runs booked in advance, regular commutes, evening trips — passengers are substituting PHVs for public transport, cycling, or simply not travelling. Drivers report noticeably longer waits between trips in the weeks since the change.
The government double windfall
Drivers are subsidising the Treasury at both ends — on every fare they complete and on every litre of fuel they purchase. The fuel VAT windfall alone is more than three times the revenue from the PHV fare VAT, and it was entirely unplanned — a consequence of the Iran conflict, not policy design.
The case for reducing VAT to 5%
A reduction in VAT on private hire fares from 20% to 5% would bring PHVs into line with public transport, which is zero-rated, and with the rate applied to domestic energy. The economic case is straightforward:
- Cuts a typical £24 fare back to approximately £21, reversing the demand destruction caused by the January increase
- More rides means higher driver earnings without any government cash transfer to drivers or platforms
- Costs approximately £1 billion per year — fully covered by the £2.5 billion fuel VAT windfall already accruing to the Treasury from the Iran conflict
- Precedent: fuel duty was cut 5p per litre during the Ukraine energy crisis in 2022 as an emergency measure — the same logic applies here
What drivers are demanding
The government has created a double burden — taxing fares and fuel simultaneously — while collecting a windfall it did not plan for. These demands ask that a portion of that windfall be used to reverse the demand destruction it has caused.
Bringing PHVs into line with public transport and reversing the passenger demand destruction caused by the January 2026 change.
The £2.5 billion in additional fuel VAT collected since the Iran conflict was not budgeted. A portion should fund retraining, EV transition support, and income protection for displaced drivers.
No impact assessment was conducted before the January VAT change. The government should model the combined effect of fare VAT, fuel VAT, and AV displacement before any further policy changes.
When drivers face extraordinary costs from external policy changes, platform margins should not remain protected at drivers’ expense.
Tell your MP the Taxi Tax must be cut
The government collected a £2.5 billion unplanned windfall from the fuel crisis. Use our template to ask your MP to demand a VAT reduction on private hire fares — and sign the petition calling for an emergency Treasury review.
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