The First Tier Tribunal decision, released on 5 July 2023, that use of the Tour Operators’ Margin Scheme [TOMS] was applicable in the case of Sonder Europe Ltd ([2023] UKFTT 00610 (TC)) was welcomed with some excitement in some circles as it was seen as an opportunity to significantly reduce VAT costs for some businesses in the property letting sector.
In simple terms, it meant that output VAT payable to HMRC on the provision of short-term holiday-type accommodation could be calculated by reference only to the margin achieved rather than the full selling price. The VAT differential would be significant because the service providers were purchasing VAT-exempt long-term residential leases from property owners/landlords but resupplying holiday accommodation subject to the full standard rate VAT at 20%, so no input tax to offset against the output tax payable to HMRC.
The different characteristics of what was bought-in [exempt residential leases] and what was re-supplied to their customers [taxable holiday accommodation] was fundamentally the basis of HMRC’s argument that TOMS could not apply, relying on Article 3(1)(b) of The Value Added Tax (Tour Operators) Order 1987 that stipulates, to qualify for TOMS, the travel services must be supplied (i) for the direct benefit of a traveller and (ii) without material alteration or further processing.
Even though Sonder may have furnished empty flats and provided cleaning and housekeeping services, the FTT bought in residential accommodation and made onward supplies of the same residential accommodation for the benefit of their business and leisure travelling customers, and that the furnishing or provision of other services were superficial so did not amount to a material alteration or further processing. The FTT therefore concluded that TOMS should apply in the case of Sonder, so their appeal succeeded.
The Upper Tribunal may have poured cold water on the initial excitement as HMRC’s appeal ([2025] UKUT 14 (TCC)) was successful and overturned the FTT’s decision, confirming that Sonder’s circumstances did not meet the criteria for their supplies to fall within the TOMS.
The UT’s decision was released on 14 January 2025 and focused on the topics of ‘direct benefit’ and ‘material alteration’ with a somewhat different emphasis and interpretation than the approach considered by the FTT. The UT concentrated on the rights acquired by the recipients of the two types of transaction and concluded that the services received by the traveller were markedly different.
On the one hand, the traveller’s rights were in the form of the grant of a licence to occupy the accommodation for specific nights, not dissimilar to the basis on which a hotel might offer accommodation for the direct benefit of travellers.
Sonder, on the other hand, by entering into internal repairing and insuring leases with the landlords for terms of multiple years, received a very different bundle of rights. In the UT’s view, those differences are sufficient to amount to material alteration from the services initially supplied by the landlords so consequently those supplies could not be for the immediate benefit of the travellers. As the onward supplies by Sonder must therefore be classed as ‘in-house’, they must fall outside the scope of TOMS.
Of course, it remains to be seen whether Sonder will seek permission to appeal this case further but in the meantime, HMRC will inevitably be very satisfied with the UT appeal outcome and, where identifiable, will almost certainly treat similar letting businesses having adopted TOMS as a result of the FTT’s 2023 decision as having made errors in their VAT returns and seek to assess and issue penalties accordingly, or perhaps expect a flurry of disclosures from businesses in this sector.
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