Gary Jacobs founder and Managing Director of DriverTax, joins us to take a look at the troublesome topic of VAT within the taxi and private hire industries.
Drivertax, is an accountancy firm that specialises in serving professional drivers. VAT is often problematic and has potentially serious consequences for both drivers and operators. TPI Group can help you solve such problems.
We asked Gary to discuss the difficulties from the perspective of both a driver and operator.
He tackles frequently asked questions relating to VAT and tries to get to the bottom of HMRC's stance. The key to which appears to be knowing how the HMRC will view your trading model.
DRIVERS: "Do I need to set up a limited company and should I get VAT registered"?
These are the first two questions that I face from taxi and private hire drivers that are operating as sole traders.
Here I’m going to concentrate on the topic of VAT (not enthralling I know but vitally important.) Next month if Plan will kindly have me back I will talk over the pros and cons as trading via a limited company.
The current VAT threshold is £83,000. So being obligated to register is not a problem for most of my driver clients. However many drivers that purchase their own cars still voluntarily register for VAT.
There are different VAT schemes available for small sized businesses and the best scheme for you is based on how you will trade. You really must take professional advice for this one.
In theory, registering for VAT should not be done purely as a cost saving exercise. While you can reclaim VAT paid out, it also means that you must charge VAT on all your sales. It also requires that proper books and records must be maintained, and you would usually account for VAT on a quarterly basis.
HMRC have become very heavy handed in the past few years and will penalise you if you are late on your VAT returns. If you register for VAT purely to collect back the VAT on large capital expenditure (such as a commercial vehicle) and then deregister shortly afterwards, the tax man can demand that you repay the VAT.
In general, most braver accountants will push back to claim back the VAT for the taxi and chauffeur vehicles if they can prove they are used 100% for business purposes.
Operators: “How does my drivers’ employment status affect my VAT bill?”
There are two big questions that keep hire and reward business owners up at night. The first relates to their drivers' employment status, a question (thanks to section 44 of The Finance Act) to which we now have an answer.
I’m not saying The HMRC are happy with this answer, but we at last have an idea of what The Revenue wants from us. As Charter Partners accountants Bundaberg we can now set a clear economic model for employment status. Driver status is relevant to VAT status. However, in this blog we are concentrating on VAT, so I will focus on that aspect of employment status.
I’m afraid that if you are after a definite answer on how employment status will affect your VAT bill you are going to be disappointed. There is no definitively safe VAT trading model within the hire and reward industry, and what I mean to say is that everything is open to question as far as The VAT man is concerned.
Instead I think you’re best looking at what is practical and what is not. Here is the definition of VAT relevant to us:
For larger scale "circuit" style companies we have a precedent set for us by a well known and very brave firm, called Parkers Cars, who took on the HMRC in 2010 and won on appeal. Parkers Cars used several hundred drivers to make supplies to accounts customers. These customers made payment to the company, which retained part of the payment as commission and passed the balance to the drivers. It is well worth reading the appeal statement (it can easily be found on the internet).
The tribunal found that the two requirements stated in S.5 (2)(b) above were not fulfilled and the section was therefore not applicable. This means that it is possible for a self-employed driver to receive money from an operator, and it not to be considered as a billable service by the operator. Therefore the amount is not subject to VAT.
There are a wealth of other case precedents that can be utilised but I think its more useful to establish some simple rules. These are based on my years of experience as accountant working in the taxi and private hire industries.
Just because you want to do it that way, doesn't mean to say your company should.
It is important for any business to be profitable but not at the expense of leaving it exposed to problems that could potentially put it out of business.
Trading via multiple companies with supposedly different descriptions is an example of a potentially risky undertaking. Some smaller operators trade in this manner in order to keep themselves under the VAT threshold. This was a common practice that will nowadays put you at odds with the HMRC.
So we can see that there was an attempt by The Revenue to recognise a way of working for all hire and reward firms, subject to the definition of whether you are acting as an agent, and your drivers' status.
It is obvious that if you rent a car to a driver and/ or charge a rent or commission for finding them work, that is subject to VAT. However, there are many questions that have not been satisfactorily dealt with. For instance:
- What if all of the drivers working for a business are self-employed and collect their own fares, which are not recorded as sales of the firm?
- What therefore is the position for credit card transactions taken by the firm? Is the company acting as a booking agent?
- What about any admin fee the driver would be charged?
In regards to the admin fee it would be about the line of supply and whether the customers were told of the agency arrangement. There is a far longer and more complicated answer to this question. However, the clue is that a canny operator would have dealt with this issue in a driver contract that reflects their working practice. Doing so would enable any inspector to immediately see the company's intention.
This brings me to two final questions……
Should my public or private hire company be VAT registered? If my company is VAT registered - how should VAT charges be passed on to or through the driver?
Unfortunately, these are not easy questions to answer and they often come in tandem.
Firstly, you must clearly decide on how you trade with your drivers and your customers. Then you and your accountant should choose a defendable position based on all of the evidence available. Much of this is also linked to whether or not your drivers are employees, meaning that all of your turnover is company income, or if your drivers are contractors i.e. self-employed, then in reality they are as much clients to you as are your passengers.
In truth the basic formula for these relationships has been tested in other trades and in the tribunals and courts. It is for HMRC to prove your trading model wrong and there has been much legal wrangling and new laws that to date have not been tested. However, we all have to accept some of the realities of VAT, as every business does.
We hope Gary’s input has been useful in understanding you VAT requirements. Next month Gary will answer the question “Should I be trading through a Ltd company?”