Black cab drivers have been handed a huge boost as the Government cracks down on online minicab firms making use of a “niche scheme” to avoid paying tax.

Chancellor Rachel Reeves said she would modernise the tax system in the Autumn Budget, which included the controversial pay-per-mile car taxes and raising taxes on online gambling.

The Budget stated that the Government would prevent ride-sharing taxi apps from “exploiting an administrative scheme intended for tour operators” to pay a lower rate of VAT than others.

From January 2, 2026, suppliers of private hire vehicle and taxi services will be excluded from the scope of the Tour Operators’ Margin Scheme.

An exception to the new rule will be when the suppliers operate in conjunction with certain other travel services.

The Treasury said the new measures would bring in around £700million a year by cracking down on the exploitation of the “niche scheme”.

It added that black cabs would no longer need to compete with online firms that “misuse” the scheme to pay less VAT.

Chancellor Reeves said: “We’re putting the brakes on the illegitimate use of a niche tax scheme to protect everyday cabbies.

“We’ll use the £700million a year this raises to deliver the country’s priorities – cutting the cost of living, cutting waiting lists and cutting debt and borrowing.”

The Tour Operator’s Margin Scheme is designed for travel and holiday businesses to pay VAT only on the profit they make on package trips.

This does not apply to the full fare, and typically reduces the effective VAT rate to four per cent.

The Treasury clarified that smaller operators outside of London, where passengers book directly with drivers, and all black cabs, will not be impacted by the reforms.

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Steve McNamara, General Secretary of the Licensed Taxi Drivers Association, praised Labour for its “decisive action” to back motorists.

He added: “The Government’s decision to apply VAT to all private hire journeys is a landmark step for fairness and integrity in our industry.

“For too long, drivers and small operators paying the full 20 per cent VAT have had to compete with online mini cab firms benefiting from a niche tax scheme.”

Popular ride-hailing app Uber has already warned that prices for passengers in London will rise as a result of the changes.

In addition to higher prices, Uber warned that its drivers would get “less work”, at a time when millions continue to struggle with the cost of living crisis.

Andrew Brem, general manager of Uber for the UK, said: “The courts have twice ruled that the Tour Operators’ Margin Scheme applied to operators like Uber.

“This decision also establishes the absurd situation where a trip in London will be taxed at a different rate than a trip anywhere else in the UK.”