In certain situations, the transport of passengers is zero rated for the purposes of UK value added tax (VAT). The consequence of zero rating is that no VAT is charged on the fare but the supplier of the transport can recover VAT paid on the costs of providing that transport. HM Revenue and Customs (HMRC) regard a supply of passenger transport as the supply of a vehicle, ship or aircraft together with a driver or crew. Where this is the case, certain services are zero rated while others are subject to VAT at the standard rate. Distinguishing between these two situations is not always a straightforward matter.
Passenger transport within the UK
The zero rating applies to passenger transport within the UK if the transport takes place within a vehicle designed to carry not less than ten passengers. This means that most bus and train fares would be covered by the zero rating but taxi fares are subject to VAT at the standard rate.
According to HMRC, the zero rating for passenger transport also covers:
Pleasure cruises; Excursions by coach or train (including steam trains); Horse-drawn buses; Sightseeing tours; and The transport element of “park and ride” schemes that are designed to relieve congestion in some city centres.
The zero rating applies regardless of whether the fares are paid by individual passengers or are made as bulk payments for groups of passengers.
HMRC do not regard the following types of activity as eligible for VAT zero rating:
The hire of a vehicle without a driver; The services of a driver alone; The supply of a vehicle for a non-passenger service (such as carrying goods); Novelty rides on miniature railways or fairground rides.
Where a passenger vehicle such as a bus is itself transported with the passengers on another vehicle such as a ship or train, this can also qualify for the zero rating provided the other conditions are fulfilled.
The following types of transport are also excluded from the zero rating and would be charged to VAT at the standard rate:
Transport to, from or within a place of entertainment or place of historical or cultural interest, when the transport is provided by the person supplying the right of admission to the place of entertainment; Transport between a car park and an airport terminal if provided by a person connected with the person providing the car parking; or Transport in an aircraft where the flight is advertised as being for recreation or the experience of flying in an aircraft or a particular type of plane.
While the distinction between these types of service and a zero rated passenger transport service is very small, nevertheless this illustrates the boundary of the zero rating. The VAT law targets the zero rating towards the types of bus, train and plane services that people need to use in their everyday lives and that we would normally consider to be passenger transport services.
Zero rating applies to the transport of passengers on any scheduled flight, this being a flight that keeps to an established timetable or runs so regularly that it is effectively a recognised series of flights. However where the transport is provided as part of a package or an inclusive tour, including other facilities, that has been bought in from third parties, the provider must account for VAT under the tour operators’ margin scheme which involves accounting for VAT on the margin earned and requires careful administration.
The zero rating also applies in the case of the transport of passengers from a place within the UK to a place outside the UK and to the transport of passengers from outside the UK to a place within the UK. The passenger transport is zero rated to the extent that the transport is within the UK, regardless of the carrying capacity of the vehicle.
Services incidental and ancillary to passenger transport
The “incidental” services provided with transport might include accompanied luggage, seat reservations and sleeping berths. These are regarded as part of a single supply of transport and are therefore charged at the same rate of VAT as the main supply. Where an extra fee or fare is charged for these incidental services, the additional charge is also subject to the same VAT treatment as the main fare.
Services that are not part of the supply of passenger transport services are referred to by HMRC as “ancillary” services. These could include meals, snacks and drinks supplied separately in the course of catering or could be services such as car parking, left luggage or lost property services. All these services supplied separately would normally be subject to VAT at the standard rate.
Transport of disabled passengers
If a vehicle has been constructed or modified to serve the needs of disabled passengers, the supplies of passenger transport made using the vehicle can be zero rated if the following conditions apply:
The vehicle would be able to carry ten or more people conventionally seated; It has a carrying capacity of less than ten people when equipped with conventional seats and/or facilities specifically designed for the use of disabled passengers; The carrying capacity of the vehicle has not been reduced for any reason other than to carry disabled passengers (even if it is later equipped for carrying disabled passengers).
This would mean for example that if a vehicle is originally equipped for carrying ten seated passengers, but later three seats are removed to make room for a wheelchair and a lift, that vehicle then satisfies the above conditions for zero rating. If however two more seats are then removed to make room for storage space, transport using the vehicle will not qualify for zero rating because the third of the conditions above is no longer satisfied.
HM Revenue and Customs www.hmrc.gov.uk
HMRC Notice 744A (December 2009)
“Value Added Tax” by Andrew Needham and Steve Allen, Bloomsbury Professional, 2009