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HMRC internal manual

VAT Taxable Person Manual

Particular trades: taxi and hire cars: accounting consequences

The accounting consequences are as follows.

  • If the drivers are employees of the cab firm, the cab firm must account for output tax on the full takings from customers. Monies retained by the drivers are outside the scope of VAT as remuneration for their services as employees.
  • If the drivers are self-employed but supply their services to the cab firm (eg see the first scenario in VTAXPER77100), the cab firm must account for output tax on the full takings from all customers. Monies retained by the drivers are consideration for a supply of services by themselves to the cab firm. This supply is potentially taxable, but it is highly unlikely that any individual driver will make enough supplies to exceed the registration limits. In these circumstances there will be no taxable supply by the taxi firm to the driver.
  • If each individual driver supplies transport direct to the customer (eg see second scenario in VTAXPER77100), output tax is only due on those supplies if that individual exceeds the registration limits. However, monies paid to the cab firm by drivers - for example to cover radio hire and booking and support services - are consideration for a supply of services by the cab firm, who must declare output tax accordingly. Cab firms may claim that part of the monies they collect from the drivers are disbursements and outside the scope. This is unlikely to be the case. However, in Crayford & Bexleyheath (Motors) Ltd (LON/95/1469A), the tribunal considered whether the appellant, a cab-hire operator who acted as an agent for self employed drivers, could treat the controllers’ fees collected from the drivers as disbursements and outside the scope. The appeal was dismissed as the appellant failed to show that the controllers were engaged by the drivers. In practice, the controllers were an essential and integrated part of the appellant’s business. The tribunal accepted our view that the appellant paid over the controllers’ fees as a principal and should account for output tax on the full amounts received from the drivers.

Even though the majority of self employed taxi drivers are not registered for VAT because they do not reach the registrable limit, it is not uncommon for a cab firm, on behalf of such drivers, to have erroneously charged output tax on the recovery of charges to account customers.

These accounting consequences are similar to those applying to driving schools, which are illustrated in VTAXPER66600.

Remember that if the answer to the question of VTAXPER76900 was ‘yes’, there will be one set of consequences for cash work, and another for account work. In these circumstances,the taxi business must still account for VAT on any supply to the drivers, even if it offsets or deducts the charge before paying them for account work. This was illustrated in the case of RJ and C Blanks (LON/95/3117). Here we conceded at the outset that the trader was acting as principal for account work and as agent for cash work. However, it was held that the appellant was still responsible for accounting for VAT on the full charge of supplying the driver with the service of a two-way radio and introductions to customers.