Generally taxi businesses use self employed taxi drivers and the taxi business provide the back office admin, radios and sometimes the cars.
There are two key types of work:
- Cash work – the passenger pays the driver when they reach their destination
- Account work – the client pays the taxi business on a periodic basis
If the taxi firm directly employs its drivers, then VAT is due on all fare income.
Where the drivers are self employed, the taxi business will often collect the income from the account work and deduct the costs for car rental, insurance, administration and radio hire (known as ‘settles’) and then pay the balance to the self employed driver.
A common mistake is that the taxi business then only accounts for VAT on the amount it retains.
HMRC will argue that the full VAT should be accounted for on the Account work and the driver should be charged VAT on the ‘settles’.
You may, depending on the terms of any written or oral contract between you and the drivers and the actual working practices of your business, be acting as an agent for the drivers for the cash work they perform, and as a principal for the work done for account customers. However, if you are to account for VAT on this basis you must be able to satisfy us that:
the arrangements are reflected in the terms agreed with your drivers and
there is a genuine difference in the operation of the cash and account sides of your business.