Ministers have mounted a £425m tax raid on ride-hailing firms including Uber.
John Healey on Wednesday outlined plans to make private-hire vehicle operators liable for VAT on the entire value of their fares.
The companies currently only pay the tax on the commission they earn, which is a fraction of the overall passenger bill.
The Treasury said: "The private hire vehicle market has grown and changed rapidly in recent years, highlighting inconsistencies in tax treatment between larger operators.
"This Budget ends this inconsistency by making larger operators liable for VAT on their full fare, in line with other goods and services, while protecting smaller operators."
In response, Uber accused the Government of creating a "two-tier" tax system and warned of higher prices for passengers.
A spokesman said: "Any changes must be fair to all passengers and drivers.
"While we await the full details of the Government's proposals, we are concerned they could create a two-tier tax system and make essential journeys less affordable for riders who need them most."
It will be up to the ride-hailing firms to decide whether they pass on the higher tax burden to customers.
However, the threat of higher fares will deal a blow to the Chancellor's pledge to deliver "breathing space" for British households struggling with the soaring cost of living.
The full 20pc VAT rate will be applied from the beginning of 2028 to private-hire operators with an annual fare turnover above a certain level.
Ministers will now consult on the level of this threshold, but have put forward £50m as their preferred option.
The move is forecast to raise £425m for the Treasury by 2031, making it one of the most significant revenue raisers for the taxman in this year's Budget.
'Taxi tax'
The fresh crackdown on ride-hailing firms and minicab companies follows a long-running dispute over how much tax they pay.
Rachel Reeves, the former chancellor, attempted to extend VAT to full fares in last year's Budget. The move, dubbed a "taxi tax" by critics , was expected to raise £700m for the public finances but triggered warnings about rising fares.
However, Uber swerved the measures by changing its contracts to shift liability for VAT onto drivers.
Under the agency model, Uber effectively acts as a booking agent while the drivers contract directly with passengers, making them liable for VAT.
This limits Uber's contribution to the taxman to VAT paid on its commission – typically 25pc of the total fare. It also reduces takings from drivers, who are only liable to pay VAT when they make more than £90,000 in bookings in a year.
The altered contract does not apply in London, where the agency model is banned under Transport for London rules.
Uber had been locked in a legal dispute with HMRC over its VAT liabilities, but ultimately won the right to use the agency model outside the capital following a Supreme Court ruling.
The closure of the loophole is expected to trigger a significant increase in the tax bill owed by Uber, which is thought to make just under half its £5.2bn in UK revenues outside London.
Major rivals such as Bolt, Freenow and Addison Lee will also face higher taxes.
Danny O'Gorman, the general manager of Freenow, said: "We will be reviewing the details of the Government's proposed changes to the private hire operating model outside of London, having already transitioned to the principal model in the capital.
"It is vital that any new regulation provides a level playing field, and critically protects passenger affordability and driver livelihoods."
