New VAT legislation for UK private hire sector takes effect

The private hire vehicle (PHV) industry in the United Kingdom is undergoing a significant operational and fiscal adjustment following the implementation of new Value Added Tax (VAT) legislation, effective January 2, 2026.

The changes, outlined by HM Revenue and Customs (HMRC), standardize how VAT is applied to passenger transport services, requiring procedural changes for licensed operators and potentially impacting consumer pricing structures.

Key legislative changes: removal of TOMS

The central component of the new legislation is the explicit removal of PHV and taxi operators from eligibility for the Tour Operators’ Margin Scheme (TOMS).

TOMS previously allowed operators to account for VAT only on their profit margin. Under the new rules, any VAT-registered entity classified as a “principal” in the transaction must now apply the standard 20% VAT rate to the full fare charged to the passenger.

This adjustment primarily affects large-scale ride-hailing and booking platforms that utilized margin schemes to manage VAT liability.

Operational models and VAT application

The requirement for VAT registration hinges on an operator’s business model and turnover threshold (currently £90,000 annually).

Principal Model: This model applies when the operator contracts directly with the passenger for transport services. Per the new law, these operators must apply 20% VAT to the entire fare. Following previous legal precedents, all London-based private hire operators are required to function as principals.
Agency Model: Outside London, some smaller local operators maintain a strict agency model, facilitating a contract between a self-employed driver and the passenger. In this structure, the operator typically charges VAT only on the commission or booking fee received from the driver.

HMRC guidance emphasizes the necessity for operators to ensure their contractual documentation and operational practices align precisely with their declared model to maintain compliance.

The introduction of full VAT liability for principal operators is projected to lead to increased operating costs that may be transferred to passengers in the form of higher fares.

Official guidance and detailed breakdowns are available for review via government publication HMRC VAT Notice 700/25 and Revenue and Customs Brief 8 (2025).