Is VAT coming our way?

HMRC’s investigations into the Private Hire and Taxi service sector led to a consultation on how VAT should be levied on agency work.

The knock-on effect of recent high-profile judgements is that VAT registered PHVOs in England & Wales would need to charge VAT on all PHV passenger fares to reflect these judgements. (HMRC will not implement changes until the outcome of an appeal to a particular case).

You may be thinking, what has this got to do with my coach operation? This doesn’t affect me as I do not have a cab company.

The answer could be absolutely nothing, but when HMRC investigates one aspect of the transport sector, it could use the opportunity to extend this across to the currently zero-rated coach and bus sector.

The other prevalent issue here is also of revenue raising. Whichever political party holds the balance of power after 4 July, they will be investigating ways to raise taxes to pay for the pledges given. Charging VAT on passenger transport would be relatively simple to implement and would not raise eyebrows in the same way as an increase in Income/Capital Gains or Corporation Tax.

So it’s worthwhile making an evaluation of the pluses and minuses of an imposition of VAT on passenger transport, if only to be fore-armed with answers should this also become a consultation.

The debate surrounding the extension of VAT to coach and bus travel has been ongoing, with proponents and opponents weighing the potential benefits and drawbacks.

Economic implications

• Extending VAT would lead to higher prices, potentially making this mode of transport less affordable for many individuals, especially those from lower-income households.
• Higher costs could discourage the use of public transport leading to an increase in private vehicle usage, in turn leading to environmental consequences and increased traffic congestion.

The impact on the sector

• The coach and bus industry may face reduced demand due to higher prices, potentially leading to job losses and decreased investment in the sector
• Smaller operators, particularly those in rural areas, could be disproportionately affected, threatening the availability of essential transportation services in certain regions.

Revenue generation for the Government

• Extending VAT to the coach and bus travel would provide an additional revenue stream for the government, this could be allocated to infrastructure projects, subsidies, environmental objectives, or other initiatives.
• (However, the potential benefits must be carefully weighed against the potential negative impacts on the industry and consumers).

Potential shift towards private vehicle usage

• Higher costs for coach and bus travel could discourage their use leading to an increase in private vehicle usage with the associated increase in carbon emissions, air pollution and general environmental impact.
• This could potentially undermine the UK’s Net Zero targets and reverse its’ ability to promote sustainable transportation.

Impact on modal shift towards public transport

• The extension of VAT could hinder the modal shift from private vehicles to public transport.
• Public transport is the more environmentally friendly option
• It could have a massively detrimental effect on achieving the UK’s climate change mitigation goals and promoting sustainable urban development.

Social Implications

Accessibility and equity concerns

• Higher ticket prices and hire costs could disproportionately impact low-income individuals and families, potentially limiting their access to essential transport services.
• This could exacerbate social inequalities and hinder mobility for those who rely heavily on coach and bus travel for commuting, education or accessing essential health services.

Impact on rural communities

• Rural areas often have limited public transport facilities and options, so the extension of VAT could further strain the financial ability of existing services in these regions.
• This would lead to reducing or ceasing of services, and hence connectivity and mobility is diminished in rural communities.

The extension of VAT to coach and bus is a hypothetical threat to the industry but is one that needs to be recognised with the onset of the consultation aimed at the private hire car and taxi sector.

While VAT on bus and coach would generate additional revenue for the Treasury, it would lead to higher costs to the customer and additional burdens to operators – notwithstanding the potential job losses in the industry and the social and environmental implications. Policymakers must carefully consider the trade-offs and prioritise measures that promote accessible, affordable and sustainable transport options for all segments of society.

Comprehensive impact assessments and stakeholder consultations are crucial to ensure that any policy decision strikes a balance between economic, environmental and social considerations.