Black cab drivers in London have received a significant boost following a government decision to close a tax loophole that allowed large app-based minicab companies to undercut traditional taxi operators.

Under the new arrangement, private hire operators in London will no longer be permitted to use a specialist tour operator tax scheme that previously enabled them to pay substantially less VAT than black cab drivers.

For several years, many black cab drivers and small taxi firms have been required to pay the full 20 per cent VAT, while major online platforms were effectively paying as little as 4 per cent, creating an uneven playing field within the industry.

The policy change means that all operators will now be subject to the same VAT rules, a move aimed at protecting drivers’ livelihoods while generating about £700 million annually to support public services and help ease pressure from the rising cost of living.

PUNCH Online reports that the term black cab drivers refers specifically to drivers who operate London’s traditional black taxis and does not relate to the race or ethnicity of the drivers.

The phrase describes the type of vehicle, namely the iconic black London cab, also known as a hackney carriage, rather than the personal background of the driver.

The decision to shut the tax loophole used by large online minicab firms was announced on Friday in a statement published on a UK government website and obtained by our correspondent on Saturday.

The measure, unveiled by HM Treasury, prevents private hire vehicle operators in London from using the Tour Operators Margin Scheme, a specialist VAT framework originally designed for holiday and travel businesses.

As a result of the reform, these private hire firms will now be required to pay VAT on fares in the same way as black cab drivers and smaller taxi operators.

According to the Treasury, the change is designed to promote fair competition across the taxi industry and is expected to raise approximately £700 million each year.

The government said the additional revenue would be channelled towards public priorities such as reducing NHS waiting lists, cutting debt and borrowing, and easing the cost of living.

Chancellor of the Exchequer, Rachel Reeves, said: “We’re putting the brakes on the illegitimate use of a niche tax scheme to protect everyday cabbies. We’ll use the £700m a year this raises to deliver the country’s priorities – cutting the cost of living, cutting waiting lists and cutting debt and borrowing.”

Industry stakeholders welcomed the announcement, describing it as a response to long-standing concerns raised by licensed taxi drivers.

Steve McNamara, General Secretary of the Licensed Taxi Drivers Association, said: “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% VAT have had to compete with online mini cab firms benefiting from a niche tax scheme.

We welcome this move and commend the government for taking decisive action.”

The Tour Operators Margin Scheme allows qualifying businesses to pay VAT only on the profit margin of certain package travel services, significantly lowering their effective tax rate.

The government noted that the scheme had been utilised by a small number of large companies in ways that fell outside its original purpose.

The Treasury clarified that smaller operators outside London, where passengers typically book directly with drivers, as well as all black cab services nationwide, will not be affected by the reform.