Tax Administration and Maintenance Day Update

18 April 2024 was Tax Administration and Maintenance Day. Although we were potentially expecting more releases following Spring Budget 2024, there were four announcements within the summary.

VAT treatment of private hire vehicles

Following decisions in Uber Britannia Limited v Sefton Borough Council in July 2023 and Uber London Limited v Transport for London in December 2021, HMRC has published a consultation on the potential impact of these judgments on the private hire vehicle (PHV) sector and its passengers.

Note there is a distinction between taxis and PHVs; broadly taxis can be hailed on the street or pick up passengers at taxi ranks whereas PHVs must be booked through a licensed operator. Taxis are therefore not directly impacted by the judgments which turned on whether the PHVO or the PHV driver was supplying services to the passenger. In addition, the High Court judgments only apply in England and Wales; not Northern Irelands and Scotland.

PHV services are subject to the standard rate of VAT of 20% as are taxis; higher volume transport services are generally subject to the zero rate. However, VAT is only payable where the businesses are VAT registered; registration is compulsory where annual turnover exceeds the VAT threshold which increased to £90,000 on 1 April 2024. In practice this means that larger PHVOs are VAT registered whereas the majority of PHV drivers are not.

The liability to charge VAT rests with the person or business making the supply. Prior to the judgements most PHVOs claimed that they acted as ‘agents’ or ‘intermediaries’ of the driver – this meant that no VAT was charged on most journeys as the PHV driver made the supply to the passenger. VAT would have typically been charged on any commission or fees for agency services paid by the PHV driver to the PHVO.

Both judgements determined that, in order for a PHVO to operate lawfully, a PHVO which accepts a booking must enter as principal into a contractual obligation with the passenger to provide the transport service. The knock-on effect of this is the VAT-registered PHVOs would need to charge VAT on all PHV passenger fares.

The consultation seeks views on the potential impacts of the judgement and potential outcomes being mindful of the fact that an appeal is being made in the 2023 case. Some PHVOs already act as principal on all journeys. For example, Transport for London has required this for any PHVO it licences following the 2021 judgment. However, a significant portion of PHVOs which are licensed outside London are likely to still be accounting for VAT as agent on some, if not most, bookings so any changes could have significant impact.

It is estimated that the increase in fares could work out to be around 1.25% to 2.5% across the whole market (albeit when averaged with other segments of PHV and taxi market where the impact would be nil). Changing the VAT or transport legislation to enable PHVOs to revert back to acting as agent (which is one of the suggestions in the consultation document) is expected to cost the Exchequer around £750 million per year.

The consultation window runs until 8 August 2024 and seeks responses from PHVOs and PHV drivers but also impacted consumers and representative bodies.

Postcode requirements for National Insurance contribution relief for Freeports and Investment Zones

Employers operating in special tax sites in Freeports and Investment Zones are able to claim secondary class 1 National Insurance contribution (NIC) relief. Secondary Class 1 NICs are only payable if the employee earns more than the Freeport and Investment Zone Upper Secondary Threshold of £25,000 per year. Broadly, relief can be claimed for all new employees in the first 36 months of their employment where those employees spend 60% of their working time on the tax site.

In order to minimise erroneous claims, HMRC intends to bring forward legislation changes to mandate relevant employers to provide the postcode of the employee’s workplace where the relief is claimed. A four-week consultation has been opened on the draft regulations which will close on 15 May 2024.

Tackling Non-Compliance in the Umbrella Companies Market

The government expects to publish its response in due course to a consultation originally opened in summer 2023 on options to reduce tax non-compliance in the umbrella companies market.

The original consultation document stated there are 1.7 million temporary workers in the UK and that many of these use employment intermediaries to source job roles. Umbrella companies employ individuals on behalf of employment business (often referred to as recruitment agencies) who are the supplied to end clients. It is the employment business rather than the umbrella company who finds work for those individuals, but the umbrella company is the legal employer.

Unlike employment agencies, umbrella companies are generally unregulated. The government is committed to regulation of umbrella companies; to enable this one part of the consultation concerned the approach to defining umbrella companies in law. Other consultation questions included due diligence requirements for either the employment business or the end client where temporary labour is being provided, deeming the employment business as the employer for tax purposes and targeted options to prevent abuse of the employment allowance and VAT flat rate schemes.

New guidance will also be published later this year including an online pay checking tool for workers in umbrella companies.

VAT treatment of charitable donations

The government has announced that it will consult on introducing targeted VAT relief for low value goods donated by businesses for charities to give away to people in need. The consultation is expected to be launched later this year.