Online minicab companies have been barred from using a niche tax scheme to reduce the VAT they pay on fares, a move the government says will level the playing

field for black cab drivers and small taxi operators.

The change, which came into force on Friday 2 January, prevents private hire vehicle operators in London from using the Tour Operators Margin Scheme (TOMS) — a VAT arrangement intended for holiday and tour businesses — to lower their tax bills.

Ministers estimate the reform will raise around £700 million a year, which will be used to help cut NHS waiting lists, reduce public debt and borrowing, and ease pressure from the cost of living.

The measure was announced at Budget 2025 by Chancellor Rachel Reeves, who said:

“We’re putting the brakes on the illegitimate use of a niche tax scheme to protect everyday cabbies. We’ll use the £700m a year this raises to deliver the country’s priorities - cutting the cost of living, cutting waiting lists and cutting debt and borrowing”.

Under the previous arrangement, some large online minicab firms were able to apply TOMS, which allows VAT to be paid only on profit margins rather than the full fare. This typically reduced their effective VAT rate to around 4%, compared with the standard 20% paid by many drivers and small operators.

Taxi groups have long argued that this created an unfair advantage for app-based firms, forcing traditional drivers to compete on unequal terms.

Steve McNamara, general secretary of the Licensed Taxi Drivers Association, described the change as a “landmark step” for the industry.

“The government’s decision to apply VAT to all private hire journeys is a landmark step for fairness and integrity in our industry. For too long, drivers and small operators paying the full 20% VAT have had to compete with online mini cab firms benefiting from a niche tax scheme”, he said. “We welcome this move and commend the government for taking decisive action.”

The Treasury said the reform would affect only a small number of large companies that had been accessing TOMS inappropriately. Smaller operators outside London, where passengers typically book directly with drivers, will not be impacted. Black cabs are also unaffected by the change.

Officials said the decision reinforces fair competition in the taxi and private hire sector while protecting significant public revenue at a time of ongoing pressure on public finances. Photo by Jimmy Barrett, Wikimedia commons.