Passengers using ride-hailing apps like Uber and Bolt in London are facing significant fare increases from this Friday, after the government proceeded with a major change to how these firms are taxed.
End of a Tax Loophole
The Treasury has closed a loophole that allowed private hire vehicle operators to use the Tour Operators Margin Scheme (TOMS) to pay VAT only on their profit margin, rather than on the full fare paid by the customer. This scheme was originally designed for holiday companies.
From Friday 2 January 2026, operators must apply the standard 20% VAT rate to all journeys, a move first announced by Chancellor Rachel Reeves in the November Budget. The change follows years of campaigning by traditional black cab drivers, who have always paid full VAT.
Steve McNamara, General Secretary of the Licensed Taxi Drivers Association, hailed the decision as a "landmark step for fairness." He argued that drivers and small operators paying the full rate had long been at a disadvantage competing against firms using the niche tax scheme.
Industry Warns of Higher Costs and Fewer Rides
The move has sparked strong warnings from the ride-hailing industry about the impact on both passengers and drivers. Andrew Brem, Uber's UK General Manager, stated that the overhaul would inevitably lead to higher prices for London passengers and could result in less work for drivers.
In a letter to the Chancellor ahead of the Budget, Uber and Bolt bosses warned that the average fare could rise by as much as 15%. They also contended the policy breached a pre-election manifesto pledge not to raise VAT, income tax, or National Insurance.
Brem also pointed out that the courts had twice ruled the TOMS scheme was applicable to operators like Uber, creating what he called an "absurd situation" where a trip in London would be taxed at a different rate than elsewhere in the UK.
Broader Economic Ripples
Dubbed the 'taxi tax', the policy is forecast to raise approximately £700 million for the Treasury by 2028. Chancellor Rachel Reeves stated the funds would be used to deliver national priorities like cutting the cost of living, reducing NHS waiting lists, and managing debt.
However, concerns extend beyond the transport sector. The UK's hospitality industry, including bars and restaurants, fears the fare hikes will further dampen demand for nights out. The sector is already grappling with increased business rates and payroll taxes.
This VAT crackdown marks a significant shift in London's transport landscape, aiming to create tax parity but adding fresh pressure on household budgets amid a prolonged cost-of-living squeeze.
