How a small cost-neutral tax change could give a major boost to DRT services in the UK

Demand Responsive Transport (DRT) is an innovative approach to public transport, utilising technology to provide on-demand bus services where passengers can book rides on-the-go. Its highly adaptable and can provide a useful alternative where fixed bus routes are being underutilised. As we look to decarbonise the economy ahead of 2050, DRT services will be increasingly important for rural areas with limited access to other public transport modes and where the private car is often the only option.

There has been welcome support from the Government for DRT services, most notably the Rural Mobility Fund which has supported 17 DRT trials in rural and suburban areas across 15 Local Authorities. Yet, the UK still lags behind other nations like Germany and the US when it comes to DRT provision.

The issue around DRT regulations

Simply put, our current licensing and tax regulations are hampering the ability of DRT services to grow and thrive, by making these services more expensive than they need to be. For local and transport authorities looking to commission DRT services, the regulations incentivise them to use larger vehicles that cost more to maintain and operate. This is because, under current licensing rules, vehicles are classified by their size, with only larger vehicles of 10 or more seats being VAT exempt. Smaller vehicles (Public Hire Vehicles or PHVs), which are often better suited to the more flexible nature of DRT services, require VAT to be applied to fares.

This rather niche tax regulation is having a detrimental impact on the sector. Ultimately, it means DRT providers use sometimes unnecessarily large vehicles, which require more resource to maintain and operate. And, given the shortage of bus and heavy vehicle drivers in the UK, these DRT services are often having to recruit from a smaller pool of qualified drivers to drive larger vehicles, increasing labour costs too. With local authorities across the country facing budget constraints, this issue is having a very real impact on the continued delivery of DRT services.

Putting DRT in line with other public transport services

What should the Chancellor seek to do as he sits down to write his Spring Budget? A simple change in the Value Added Tax Act to make DRT services VAT-exempt would be a major boost for this innovative new mobility service. It would put DRT on a par with other public transport modes, which are also VAT exempt, and would be revenue neutral for the Treasury, given local authorities are mostly not using PHVs anyway. And, it would require no change to primary legislation – it's a move the Treasury could make immediately.

Given the Government's support for DRT, a change in the VAT rules is clearly a sensible and much-needed move. If we are to support rural and low-income communities to access jobs, amenities, friends and family, we need to make DRT a cornerstone of our transport policy. This small change in regulations would show the Government's intentions to do just that.

You can read ITS UK's open letter to the Chancellor here