Recent changes to UK VAT legislation are affecting many private hire vehicle (PHV) operators, taxi booking businesses and ride-hailing platforms. The reforms are intended to clarify how VAT should be accounted for and remove the use of the Tour Operators’ Margin Scheme (TOMS) for most taxi and private hire journeys.

If your business operates in the passenger transport sector, it’s important to understand how these changes could affect your VAT obligations.

What Changed on 2 January 2026?

From 2 January 2026, businesses that buy in and resupply taxi or private hire journeys as principals (or as agents acting in their own name) can no longer account for those journeys under the Tour Operators’ Margin Scheme (TOMS), except where the journeys form part of certain qualifying travel packages.

Affected businesses must instead apply the normal VAT accounting rules to those supplies.

How Did TOMS Work?

Under the Tour Operators’ Margin Scheme, eligible businesses paid VAT only on their margin or commission, rather than on the full value of the journey.

This could result in a lower VAT liability than applying the standard VAT rules.

The Government introduced the new legislation following court decisions and to provide greater certainty for the sector.

How Does VAT Work Now?

For businesses affected by the changes:

• Normal VAT accounting rules apply.
• A VAT-registered operator acting as principal will generally account for VAT on the full fare charged to the passenger.
• TOMS is no longer available for most taxi and private hire journeys.
• An exception remains where the journey forms part of certain qualifying travel packages.

Example

A passenger pays £20 for a journey.

Under the previous TOMS treatment, an operator using the scheme might have accounted for VAT only on its commission or margin.

Following the rule changes, a VAT-registered operator acting as principal will generally account for VAT under the normal VAT rules on the full fare.

Depending on the operator’s business model, this may increase the amount of VAT payable and affect pricing or profit margins.

Who Is Affected?

The reforms mainly affect:

• Private hire vehicle operators acting as principals.
• Ride-hailing platforms.
• Taxi booking businesses acting in their own name.
• Businesses that buy in and resupply taxi or PHV journeys.

Individual drivers may not need to register for VAT if they are making taxable supplies in their own right and their taxable turnover remains below the VAT registration threshold.

What Could This Mean for the Industry?

The changes may result in:

• Higher VAT liabilities for some operators.
• Changes to pricing structures.
• Reviews of agency and principal business models.
• Updates to driver agreements.
• Greater emphasis on VAT compliance.

Many businesses have already reviewed their operating models to adapt to the new legislation.

How Business Management Consultation Can Help

At Business Management Consultation, we advise transport businesses on the correct VAT treatment of their services.

We can help you:

• Review your VAT structure.
• Determine whether your business acts as principal or agent.
• Ensure the correct VAT treatment is applied.
• Maintain compliance with HMRC requirements.
• Review the impact of the TOMS changes on your business.

Professional advice can help ensure your business applies the correct VAT treatment while avoiding unnecessary compliance risks.

Conclusion

The VAT changes that took effect on 2 January 2026 represent an important shift for many private hire and taxi operators. Businesses that previously relied on the Tour Operators’ Margin Scheme should ensure they understand whether the new legislation applies to them and whether their VAT accounting processes need updating.

Reviewing your business model and VAT treatment now can help you remain compliant and minimise the risk of future disputes with HMRC.

Call us today on 01273 777 333 for advice on how these VAT changes may affect your transport business.