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A lightning bolt for the VAT Tour Operators Margin Scheme

Author: Ed Saltmarsh

Published: 27 Feb 2024

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In the case of Bolt Services UK Limited, the First-tier Tribunal found that mobile ride hailing services fall within the Tour Operators Margin Scheme (TOMS). Ed Saltmarsh considers the implications of the decision for the industry and for the fate of TOMS itself.

Bolt Services UK Limited (Bolt) supplies on-demand, private hire passenger transport services, which are ordered and paid for through a smartphone app. Following notable court rulings regarding Uber’s business model in the UK, both Bolt and HMRC accepted that Bolt acts as principal, and that UK VAT is chargeable at the standard rate (20%) on its supplies of ride-hailing services. 

However, this dispute, heard before the First-tier Tribunal (FTT) in September 2023, was in relation to the value of the supply on which VAT was due. Should Bolt account for VAT by reference to the total amount paid by the customer or, under the rules of the Tour Operators Margin Scheme (TOMS), should it only account for VAT on its margin?

In short, Judge Greg Sinfield determined that the services supplied by Bolt are services of a kind commonly provided by tour operators and the supply of such services falls within the scope of TOMS. As a result, Bolt is eligible to account for VAT only on its margin. But how did we get here, and what does this mean for the UK TOMS?

The pick-up

In the taxi and private hire industry, drivers have traditionally operated as self-employed individuals. The role of taxi associations or private hire companies has primarily been to act as intermediaries, facilitating the provision of services from these drivers to passengers. 

Therefore, although the default VAT position is that fares charged to passengers for taxi or private hire journeys are liable to VAT at the standard rate, as most drivers individually turn over less than the VAT registration threshold (currently set at £85,000 annually), they typically are not required to register for VAT. Consequently, neither are they obligated to charge and account for VAT. 

Meanwhile, assuming they do have a taxable turnover of more than £85,000, the taxi associations or private hire companies that arrange the services supplied by the drivers are responsible for accounting for VAT only on the specific services they provide to the drivers, rather than on the full value of the transport services arranged.

This business model came under scrutiny with the launch, and fairly meteoric rise, of Uber in the UK. Having launched in 2012, Uber reports that it now has more than 100,000 drivers in the UK providing ‘rides’ to more than five million active ‘riders’ (or passengers). As with traditional taxi firms, Uber only accounted for VAT on the supplies of services it made to drivers. Due to Uber’s size, this gained significant public attention.

However, it was actually an employment case that started the shift in the VAT treatment of Uber’s services. In 2016, two drivers took Uber to an employment tribunal, arguing that rather than being self-employed, they worked for Uber. This case worked its way through the UK’s court system until, in 2021, the Supreme Court decided that Uber drivers were indeed ‘workers’ and not self-employed. 

The court considered several factors in making its decision, including:

  • Uber set the contract terms for drivers and riders;
  • the drivers had no say over how much riders were charged; and
  • Uber could penalise drivers for rejecting too many rides.

This decision, among other factors, had a knock-on effect on the VAT treatment of Uber’s services. If the drivers were employed by Uber, and not self-employed, then Uber must be making supplies of ride-hailing services as principal, not as agent. As a result, it should account for VAT on the full value of the transport services provided. Following the outcome of this case, Uber said that its prices would rise by 20% in the UK. Uber went on to take Sefton Metropolitan Borough Council to court to try to force 16,000 private hire vehicle operators outside London to account for VAT in the same way. It won the case.

Further to losing the employment case, Uber also settled its VAT dispute with HMRC, reportedly paying £615m to do so. This was significantly less than Uber’s VAT liability had been estimated by some observers, possibly due to Uber calculating its VAT liability under TOMS.

Enter Uber’s competitor, Bolt, which wrote to HMRC in October 2022 asking for a non-statutory ruling that TOMS applied to the services supplied by Bolt as principal. HMRC rejected this approach in February 2023, stating that TOMS did not apply to its ride-hailing services. Bolt appealed to the FTT against HMRC’s decision.

The ride

According to HMRC, TOMS is a special VAT accounting scheme for businesses that buy and resell travel, accommodation, and certain other services as principal or undisclosed agent. Under TOMS, VAT is not charged on each individual sale. Instead, VAT is applied on the margin made by the tour operator, which is the difference between the total amount received from customers (riders) and the total amount paid to suppliers (drivers).

As a result of Bolt’s appeal, it was the job of Judge Sinfield to decide whether the supplies of ride-hailing services by Bolt fall within the scope of TOMS, specifically on-demand rides supplied on or after 1 August 2022 when Bolt’s current contractual terms were introduced. 

As a result of Bolt’s appeal, it was the judge’s job to decide whether the supplies of ride-hailing services by Bolt fall within the scope of TOMS

Interestingly, Bolt still treats its drivers as self-employed. Unlike in the Uber Supreme Court case, Bolt’s drivers have more control over their operating parameters, including the ability to select a minimum price per mile. Drivers are also not penalised for rejecting ride requests. However, as noted above, Bolt changed its contractual terms on 1 August 2022. Since that date, Bolt has been clear that it acts as principal in the resupply of passenger transport by private hire vehicle. Bolt contracts separately with both drivers and passengers, it is responsible for all invoicing and payments and, crucially, there is no contractual relationship between driver and rider.

Where Bolt and HMRC disagreed was whether Bolt’s supplies fell within the scope of the TOMS. There were two points of contention:

  • whether Bolt is a tour operator for the purpose of TOMS; and
  • whether Bolt supplies the services of the drivers to its passengers without material alteration or further processing.

Bolt argued that it is a tour operator for the purpose of TOMS as it provides services commonly provided by tour operators. Passenger transport by private hire vehicle is a service which is commonly provided by tour operators or travel agents (eg, airport transfers). Ms Sloane KC, representing Bolt, contended that the meaning of tour operator or travel agent must be determined on a functional basis to avoid a lack of neutrality between supplies of travel services by different suppliers.

However, HMRC argued that tour operators and travel agents do not provide on demand transport services from anywhere at any time to anywhere. HMRC believed that an ordinary person would consider a tour operator or travel agent as businesses catering to those wishing to make pre-booked journeys.

Judge Sinfield rejected HMRC’s argument on this point, believing that a high level or general view needed to be taken when considering whether Bolt is a tour operator. He noted that making a detailed examination of this point carried the risk of inconsistent application of VAT to supplies to travellers and distortion of competition between traders in the same sector. For example, Judge Sinfield stated that “any distinction based on how far in advance a ride was booked would necessarily be arbitrary” and that such a threshold could not be determinative.

The second point of contention was whether Bolt supplied the services of the drivers to the passengers without material alteration or further processing. HMRC had submitted that Bolt’s supplies fall outside TOMS as they are in-house supplies or materially altered compared to the supplies made by the drivers to Bolt. HMRC contended that Bolt provides its customers access to and use of the app, the PHVO licence, the pool of drivers and the transport itself. Judge Sinfield did not agree with this analysis. Perhaps most importantly, he noted that the drivers’ services directly benefitted the travellers, rather than Bolt, and were not in-house services or materially altered.

Bolt is only required to account for VAT on its margin on the supply of ride-hailing services … it now seems likely that the same is true of Uber’s ride-hailing services

The tribunal therefore concluded that:

…the supply of mobile ride-hailing services, without any additional elements, to a traveller is a provision of travel facilities within the TOMS in the same way as a supply of accommodation only.”

As a result, Bolt is only required to account for VAT on its margin on the supply of ride-hailing services. Although the VAT treatment of private hire vehicle services will depend on the specifics of the contract and the economic reality of the situation, it now seems likely that the same is true of Uber’s ride-hailing services.

The destination

For hopefully obvious reasons, it is understood that HMRC does not like the outcome of this case. A spokesperson noted that HMRC was “disappointed with the ruling and carefully considering the tribunal’s decision”. 

However, it’s worth noting that this decision doesn’t stand in isolation. Earlier in 2023, HMRC lost a separate TOMS case at the FTT: Sonder Europe Ltd v HMRC, which concerned the ‘rent to serviced accommodation’ sector. Briefly, the company provided short-term accommodation to travellers in the form of self-contained apartments it had leased on a long-term basis from third-party landlords. Judge Sinfield also presided over that case and found that the company’s services do fall under TOMS. Although an FTT ruling doesn’t set a legally binding precedent, there seems to be a sense of a general direction of travel for the VAT treatment of this sector.

We understand that HMRC is currently seeking views from the sector on the operation of the TOMS in the UK post-Brexit. It was announced at Autumn Statement 2023 that the government would consult in early 2024 “on the impacts of the July 2023 High Court ruling in Uber Britannia Ltd v Sefton MBC”. It seems only logical to conclude that that consultation will now include a consideration of how TOMS applies to the sector.

The question HMRC might now be considering is whether we still need TOMS in the UK. It was introduced in the EU to simplify VAT compliance for businesses in the travel industry who might buy and sell travel across several member states, and to prevent double taxation or non-taxation of such services. Now that the UK, with the complex exception of Northern Ireland, is not part of a wider VAT area, it should be considered whether the scheme, widely considered one of the most complex areas of VAT, is still necessary. The financial implications to the government should HMRC not successfully appeal the Bolt case must now be adding further weight to the argument to abolish TOMS in the UK.

Ed Saltmarsh, Technical Manager, VAT and Customs

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