I beg to move Amendment 42, in Clause 79, page 95, line 37, at end insert—

“(3B) Section (3A) does not apply to journeys by private hire vehicle or taxi in rural areas.”

This amendment would exempt journeys by taxi and private hire vehicle in rural areas from the provisions of subsection (3A) of section 79.

With this it will be convenient to discuss the following:

Clause stand part.

New clause 14—Report on VAT for private hire and taxi vehicles—

“The Chancellor of the Exchequer must, within six months of this Act being passed, lay before the House of Commons a report on the impact of implementation of the provisions of section 79 on—

(a) the taxi and private hire industry,

(b) driver earnings,

(c) vulnerable passengers,

(d) rural communities, and

(e) passenger fares.”

This new clause would require the Chancellor of the Exchequer to report on the impact of section 79 on the taxi and private hire industry, driver earnings, vulnerable passengers, rural communities and passenger fares.

It is a pleasure to see you back in the Chair presiding over our proceedings this afternoon, Mrs Harris. I will speak to Amendment 42, which stands in my name and that of my hon. Friends, along with Clause 79 and new clause 14.

Clause 79, which many are already calling the taxi tax —that is certainly what people in the industry are calling it—changes the way VAT is applied to taxi and private hire vehicle journeys. Currently, under the tour operators’ margin scheme, VAT is charged only on the operator’s margin—that is, the difference between what the operator charges the customer and what it pays the underlying provider. The clause will remove taxi and private hire vehicle transport from the scope of the tour operators’ margin scheme.

The clause is being brought forward following a defeat for His Majesty’s Revenue and Customs on precisely this point. The tribunal rejected HMRC’s claim that ride-hailing services do not qualify for TOMS, although I understand that there is still an appeal, which is due to be heard in March. Perhaps the Minister can explain how much money is being spent preparing for that, if this legislation is going to make the question moot.

In practical terms, the clause means that drivers and businesses now have to charge VAT at 20% on the fare paid by the customer—taking, for example, a £20 fare to £24. The measure took effect from 2 January this year. The Labour party promised in its manifesto not to increase VAT. It is true that it has not increased the rate, but it has certainly expanded the scope of its application through this measure. According to the Government’s own Budget policy costings document, the change will raise about £190 million in 2025-26, rising to some £675 million a year by 2031. That strikes me as a significant new burden—a significant new tax—on private hire and taxis, hence the “taxi tax” sobriquet. It is passengers who will ultimately end up paying the bill.

Industry bodies have warned that fares could increase by double-digit percentages in some areas. Every penny of extra VAT will be passed on to passengers who rely on these services because they have no viable public transport alternatives. That is particularly the case in rural areas and among disabled and elderly passengers, women wanting to get home safely at night and workers on early shifts. They are the people who will be affected by this taxi tax.

Like quite a few members of the Committee, I represent a rural Constituency. We have a lot of villages that are not connected to our towns, and a lot of elderly people who need to get to appointments. There are also a lot of children with special education needs and disabilities who get to school via taxis. Does my hon. Friend agree that the increase in fares, which will be passed on to our vulnerable constituents, is unacceptable, and that a charge will be passed on to local authorities, which is not fair to our local taxpayers?

My hon. Friend, like me, has a very rural Constituency that spends tens of millions of pounds on this. I think Norfolk spends around £30 million or £40 million a year on taxis to transport pupils with special education needs to school. That is a huge proportion of the money that is spent on special educational needs, and potentially adds to the burden and costs of councils who are struggling, particularly in rural areas. They have been—I will be polite—disadvantaged by the latest local government settlement and the way that the Government have skewed the formula against rural areas, having already removed the rural services grant, which we had come to rely on.

What is the Government’s estimate of the average fare increase for passengers as a result of this measure? How can the Treasury justify raising the transport costs at a time when families are already struggling and the Government claim that the cost of living is their priority?

The charge in this Clause will not only hit passengers. Operators will face new administrative burdens as they try to account for VAT under far more complex rules. That creates uncertainty—this Committee has discussed the need for certainty on many occasions—and increases the costs for local businesses that operate on relatively small margins. As one operator of a private hire vehicle firm said, rather starkly,

“a 20% VAT hike would hit the elderly, disabled and rural passengers hardest. Businesses cannot plan, invest or grow while uncertainty remains.”

The places most exposed are those with limited public transport networks and a consequently high reliance on the use of taxis and private hire vehicles. That is why we have tabled Amendment 42, which proposes to exempt rural communities. It is a simple and fair way to protect those most affected. It would amend clause 79 so that the charge does not apply to journey by private hire vehicle or taxi in rural areas.

If the Minister refuses that limited relief, will he at least commit to supporting new clause 14? It would require a proper impact assessment of the effect of the measure on the taxi and private hire industry, driver earnings, vulnerable passengers, rural communities and passenger fares.

There is a practical problem with clause 79, as with so many clauses that we have debated. Some major operators, including Uber, have reclassified themselves or are exploring ways to reclassify themselves as technology platforms rather than transport providers. That seems to be happening in cities outside London already. If they succeed, the VAT liability would shift from the company to the individual drivers, many of whom are not VAT-registered owing to their earnings level. What is the Minister’s response to that shift, which is already taking effect in parts of the country?

Concerns have also been raised by the Institute of Chartered Accountants in England and Wales that the list of qualifying services in proposed new subsection (3A) in section 53 of the Value Added Tax Act 1994 is too narrow. The institute contends that the list excludes other key designated travel services, most notably trips, excursions and the services of tour guides. That creates a genuine issue for tour operators who supply day-trip packages, whether to the coast of North West Norfolk or to other parts of the country. A lot of small, often family firms provide these services.

For example, if the package consists of a private car transfer, picking up someone from King’s Lynn station and taking them up to sunny Hunstanton, and that is combined with a professional tour guide or excursion ticket, under the clause the private hire element will fall out of TOMS while the guide or excursion will remain in it. What will that do? It will add considerable complexity, forcing the unbundling of a single commercial package. It will require changes to systems and changes to invoicing.

If the intent, as the Minister will no doubt tell us, is simply to go after taxis and private hire vehicles, this is a glaring example of where the drafting is wrong and goes too far. The ICAEW contends that the existing ancillary tests are robust enough to avoid any obvious attempt to dodge paying the tax that is due.

This is a tax rise that will increase fares, hurt rural and vulnerable passengers and create fresh uncertainty in a vital sector. In my constituency, the funding that has been provided for buses is reducing in comparison with the funding provided by the last Government. I expect that that position is being replicated across the country. People in my constituency do not have the luxury of the regular services that I am sure the Minister has in his Chipping Barnet constituency, with maybe three an hour. In parts of my constituency, three a day would be frequent.

I hope that the Minister recognises the points that are being made on behalf of rural areas; I am sure that other hon. Members who represent rural areas will not sit silently when the issue is being discussed, but will speak up for their constituents.

As I say, this is a tax that will increase fares, hurt rural areas and vulnerable passengers and create uncertainty. It will also add to the cost of living. The Office for Budget Responsibility has forecast that real living standards will increase by 0.25% in each year of this Parliament, which is a staggeringly low figure when the average has been 1% in each of the past 10 years. That is not a great record—no wonder the Government are cancelling elections left, right and centre.

If the Government are intent on pressing ahead, the very least the Minister can do is agree to review the measure, looking at fare levels, passenger numbers and any reduction in service availability. Otherwise, I look forward to pressing to a vote my amendment, which would protect rural areas.

In November, the Chancellor told the House that what we are now seeing in Clause 79 would protect about £700 million of tax revenue, ensuring that VAT is paid on fares. Yet, according to The Guardian on 2 January, Uber

“has swerved paying millions of pounds” by simply rewriting its contracts with drivers so that it acts

“as an agent, rather than as the supplier” outside London. That means that the vast Majority of Uber fares outside the capital will avoid the 20% VAT tax on Uber and, as the majority of drivers’ earnings are below the VAT threshold, that money will not come into the Treasury. Meanwhile, passengers in London, where Transport for London has prevented the agency model, will see higher fares.

Can the Minister explain how much of the projected £700 million in revenue is actually going to be protected, given Uber’s change? Why are we now in a position where we have an absurd two-tier system in which identical journeys are taxed differently depending on whether they take place inside or outside London? I note that no Government Amendment to the clause has been tabled. Has the Treasury accepted that because of Uber’s decision, this policy has failed before it has even begun?

On reading the Clause, I too was concerned about the costs for SEND. Devon, which is a very rural county, spends something like—from memory—£50 million a year on taxis to move children across the county who require special schools in different areas. A 20% tax on that would equate to £10 million. Will the Minister clarify whether taxis used for SEND transport by councils are included? If so, will the Minister please negotiate the extra money that will be required, so that we do not have our SEND budget in Devon cut by £10 million?

It is a pleasure to speak under your chairship, Mrs Harris. I am very glad to see you in the Chair. Rather than running through these changes in detail, let me respond to some of the points that have been raised, because they are important and, in some cases, valid.

As a tax Minister, I am not going to comment on the affairs of individual taxpayers, by which I mean individual businesses, but I will say that the exclusion from TOMS applied to several large private hire vehicle operators. Crucially, it ensured that they were subject to the same tax rules as everyone else. That is what this change is trying to do.

Regarding any subsequent potential changes to the operation of business models that may or may not have taken place—hon. Members have mentioned some reports, but at this stage they are only reports—HM Revenue and Customs will always make an operationally independent assessment of whether a private hire vehicle operator is operating as an agent or, as it is sometimes called, a principal, and it will charge tax accordingly. If there are any implications—we do not know yet whether there will be—any costing update will flow into the forecast as usual.

I am confident, and the Government are confident, that this exclusion is carefully targeted. On the point that the hon. Member for North West Norfolk made about travel operators more broadly, there is a provision for bundled private hire vehicle operators to remain within the scheme, so we are confident that this change is appropriately targeted.

The changes that we are making will put to an end the exploitation, by a small number of private hire vehicle operators, of an administrative scheme that is intended for tour operators only, which lowers their effective VAT rate to around 4%. The Government think it right and fair to make sure that that option is no longer on the table. The OBR certified our costings for the Budget, and this measure is expected to raise £700 million in tax revenue in each year. That is vital to the public finances.

May I return to the point about the ancillary services? Proposed new subsection (3A) in section 53 of the 1994 Act requires only

“the provision of accommodation, or…the transport of passengers by bus, coach, train, ship or aircraft.”

Excursions or trips are not covered, which is why the ICAEW has suggested simply amending the wording to include the services of tour guides, trips and excursions to ensure that genuine day-trip packages, wholly within TOMS, continue to be protected. Under the Clause as drafted, they will not be; a proportion of them will face an extra 20% charge. That is the case, is it not?

We are confident that the exclusion drafted in the Bill is carefully targeted and will not have unintended implications by limiting the activities of legitimate tour operators. It is right to make this change, which will raise £700 million of tax revenue that the Government believe should already be being paid. It will be a vital contribution to the public finances.

Will the Minister address the SEND concerns, please?

The Government are, of course, aware of the pressures on local council finances as a result of the growing number of children with additional needs who require transportation or other support. It is important to note that the Clause does not seek to apply additional VAT to those who are not already seeking to make use of the TOMS. The vast Majority of taxi services across the country are not using the TOMS and will be unaffected by this change, but we think it right to ensure that this particular use of the TOMS cannot continue, in order that we can raise revenue.

Will the Minister give way?

I have given way multiple times, but I am happy to do so again, because we are in Committee and it is good to have thorough scrutiny.

I thank the Minister for his generosity. Will he confirm that if any local authority sees an increase in its spending on SEND transport because of the 20% VAT, the Treasury will work with the Ministry of Housing, Communities and Local Government to ensure that those authorities are paid back in full for that extra cost? That reassurance would help to put our minds at ease, along with council leaders and council chief executives across the country who are worried that they might have a hole in their budget come the next financial year.

Local authorities have usual and long-standing mechanisms for handling their VAT liabilities, including reclaiming the VAT where permissible.

I hope that I have responded with sufficient thoroughness to the points that have been raised. I commend the Clause to the Committee and urge that Amendment 42 be withdrawn and new clause 14 be rejected.

I need to hammer the nail about day-trippers while we have the taxman on the Government Benches. Proposed new subsection (3A) in section 53 of the 1994 Act does not provide for day-trip excursions not to be in scope; it refers simply to accommodation and passenger transport not being captured. I hope that the Minister might look at that again, because certainly in tourist areas such as my own Constituency, those day trips are part of the local economy and hospitality sector. He knows well from his portfolio that pressures are being placed on hospitality businesses more broadly, not just on pubs.

I am not sure whether we got the full guarantee on SEND. Perhaps the Minister will write to the Committee to set out the position on that, so we all have clarity and can go back to our local authorities to assure them that the £700 million that the Government are looking to raise in additional taxes will not be coming from our council tax payers.

I am not satisfied that the Minister has dealt with the rural issue or the impact on such areas. I appreciate that he does not come from a rural constituency, so he does not have that at his fingertips, but certainly in my area, people rely on private hire vehicles and taxis to get around. That is a big issue, so I will therefore be pressing the Amendment to a vote.

Question put, That the amendment be made.

The Committee divided: Ayes 5, Noes 9.

Question accordingly negatived.

Clause 79 ordered to stand part of the Bill.