Uber Avoids Hundreds of Millions in Tax Through Contract Overhaul as New VAT Rules Take Effect

What Changed and Why It Matters

The Chancellor's Autumn Budget introduced what critics have dubbed the "taxi tax"—a closure of the Tour Operators Margin Scheme loophole that ride-hailing platforms had exploited for years. Under the old system, companies like Uber paid VAT only on their commission, typically around a quarter of each fare. The new rules mandate that operators must charge 20% VAT on the entire passenger fare when acting as the principal supplier.

Rather than accept this substantial increase in tax liability, Uber has rewritten the fundamental legal relationship between itself and tens of thousands of drivers operating outside London. The company now describes itself as merely a technology platform facilitating connections between independent service providers and customers.

From Employer to Middleman: The Agency Model

Under Uber's revised contractual framework, drivers are no longer working through Uber as the primary service provider. Instead, they're positioned as independent contractors who directly supply transportation services to passengers, with Uber serving as a booking agent in the middle.

This distinction isn't semantic—it's a legal transformation with massive financial implications. When drivers are the principal suppliers, they become responsible for VAT obligations, not Uber. And here's the critical detail: individual drivers don't need to register for VAT until their annual bookings exceed £90,000, a threshold most will never reach.

The practical outcome? The vast majority of rides outside London will continue without VAT being charged, despite Parliament's intention to apply the tax to these transactions.

The Numbers Behind the Strategy

The financial stakes are enormous. Based on company filings with US stock markets, Uber faced potential VAT liabilities exceeding £600 million annually under the new principal model. With Uber's operations outside London accounting for nearly half of its £5.2 billion UK minicab revenue, the tax exposure would have materially impacted the company's UK profitability.

By shifting to the agency model, Uber has dramatically reduced this burden while simultaneously undermining the Treasury's revenue projections. The government had counted on these reforms to contribute substantially to public finances, with Reeves emphasizing the measure would create "fairer" competition in the taxi industry.

Why London Is Different

Transport for London's regulatory framework prevents Uber from employing the same strategy in the capital. London's licensing requirements explicitly mandate that private hire operators must contract directly with passengers, making an agency structure legally impossible.

Consequently, Uber remains the principal supplier for all London journeys, meaning the company must charge VAT on full fares in the city. This regulatory divide creates a two-tier system across the UK, with potentially significant implications for pricing. Uber has already indicated that London fares may rise to offset the increased tax burden.

The capital represents a substantial portion of Uber's UK business, meaning the company still faces considerable VAT exposure despite the restructuring elsewhere.

A Familiar Playbook With New Twists

This isn't Uber's first attempt at using an agency model to minimize tax liability in the UK. The company previously operated under this structure nationwide but abandoned it in 2021 when a London judge ruled against the arrangement. The legal landscape shifted in summer 2025 when the Supreme Court determined that the agency model could be used outside the capital, opening the door for Uber's current restructuring.

The timing reveals strategic planning. Uber had been locked in prolonged disputes with HMRC over the validity of the margin scheme, paying £1.4 billion to tax authorities between 2022 and 2024 while challenging the assessments. HMRC had faced setbacks in parallel cases against Uber competitor Bolt, suggesting the legal ground was uncertain.

Rather than continue fighting on the old battlefield, Uber has essentially changed the game board entirely.

Hidden Changes: Commission Rates Surge

Buried within the new contract terms is another significant shift: Uber can now claim up to 49% commission on individual fares. This represents a dramatic increase from the 20% rate the company charged when entering the UK market and the 25% it later standardized.

The company has moved to what it calls a "dynamic" commission model, where its take varies between 3% and 49% based on undisclosed factors. While Uber insists its average commission isn't increasing, the new upper limit gives the company substantial flexibility in how it extracts value from the platform.

For drivers already struggling with rising costs and stagnant earnings, this contractual change adds another layer of uncertainty to their income prospects.

Industry Backlash and Driver Concerns

The restructuring has generated strong criticism from industry observers and driver advocates. Many argue that Uber is attempting to have it both ways—claiming to be merely a technology platform when convenient for tax purposes while maintaining iron-fisted control over fares, passenger allocation, and driver ratings.

Drivers face being pushed into an administrative quagmire they never sought. While most won't cross the VAT threshold, the uncertainty creates anxiety. Those who do approach the threshold face complex decisions about whether to limit their work, navigate HMRC registration, or risk non-compliance.

Industry commentators note that drivers who wanted to simply earn a living now potentially bear responsibility for tax compliance without having chosen to become independent business operators in any meaningful sense. The control dynamics haven't changed—Uber still determines prices, allocates customers, and can deactivate drivers—but the legal and tax responsibilities have shifted downward.

Government's Dilemma

The Treasury finds itself in an awkward position. A spokesperson defended the VAT reform as benefiting "everyday cabbies with a fairer tax system" while raising revenue for national priorities. However, the policy's effectiveness is now in serious doubt.

The government presumably anticipated that platforms would either absorb the tax increase or pass it to consumers through higher fares, with the Treasury collecting significant revenue either way. Instead, Uber has found a structural workaround that achieves neither outcome outside London.

Closing this new loophole would require additional legislation, likely facing opposition from both the tech industry and potentially from drivers concerned about VAT obligations. The political optics of repeatedly adjusting tax rules to chase after a single company's evolving business structures are less than ideal.

Market Fragmentation and Future Implications

The resulting patchwork of rules creates a fractured market. London operates under one system with full VAT charges. The rest of England and Wales operates under another, with minimal VAT collection. This geographical arbitrage could influence where companies focus their operations and how they price services.

Traditional taxi and minicab operators who have long paid VAT on full fares now face even steeper competitive disadvantages outside London, where Uber and similar platforms effectively operate in a lower-tax environment. The "fairer competition" that Reeves promised appears to have moved further out of reach.

Moreover, this episode illustrates the broader challenge of regulating platform-based businesses that can rapidly restructure their contractual arrangements in response to policy changes. Traditional regulatory and tax frameworks struggle to keep pace with companies that treat legal structures as flexible tools rather than fixed constraints.

What Happens Next

The immediate future likely involves several developments. Legal challenges seem probable, either from HMRC seeking to redefine the agency relationship or from competitors arguing unfair advantages. The government may introduce new legislation attempting to close the loophole, though drafting rules that can't be circumvented presents significant challenges.

For passengers, the dual system means London riders may see fare increases while those elsewhere might see little change. For drivers, the uncertainty continues as they navigate evolving contracts and potential tax obligations they never anticipated.

What's clear is that the relationship between gig economy platforms, workers, regulators, and tax authorities remains in flux. Uber's latest restructuring represents not an endpoint but another chapter in an ongoing negotiation over how these businesses should be governed and taxed in the 21st century economy.

The £700 million question is whether the government will accept this outcome or find new ways to ensure that platform-based businesses contribute their intended share to public finances.

Frequently Asked Questions

What exactly is the "agency model" that Uber is now using?

Under the agency model, Uber repositions itself as a technology platform that simply connects drivers with passengers, rather than being the company that directly provides the ride. In this structure, drivers are treated as independent suppliers who contract directly with passengers, while Uber acts as a booking agent or intermediary.

Why doesn't this work in London but work elsewhere in the UK?

Transport for London has specific licensing regulations that require PCO drivers to contract directly with passengers. This regulatory requirement makes it legally impossible for Uber to use an agency model within the capital; the company must remain the principal supplier of transportation services. Outside London, different licensing frameworks don't have this same restriction, which the Supreme Court confirmed in 2025.

How much money is the Treasury losing because of this restructuring?

The government expected the VAT reforms to raise over £700 million annually across the entire ride-hailing sector. Uber alone faced potential VAT liabilities exceeding £600 million per year if it had been required to charge VAT on full fares as the principal supplier. By shifting to the agency model outside London, Uber has dramatically reduced this exposure. The exact figure depends on how many drivers actually cross the VAT threshold and register, but given that most won't, the revenue shortfall is substantial.

What does this mean for Uber drivers and their income?

For most drivers, the immediate impact is primarily administrative uncertainty rather than direct financial change. Drivers now technically bear responsibility for VAT compliance, though the vast majority earn well below the £90,000 threshold and won't need to register.