Important Update for Serviced Accommodation Providers: Upper Tribunal Reverses Sonder Europe’s TOMS VAT Decision

If you operate in the serviced accommodation sector, the recent developments in the Sonder Europe Ltd case are critical to understand. The Upper Tribunal’s ruling on 14 January 2025 has brought new clarity, but also raised challenges regarding the application of the Tour Operators’ Margin Scheme (TOMS) in the hospitality and accommodation industries. At Deeks […]

If you operate in the serviced accommodation sector, the recent developments in the Sonder Europe Ltd case are critical to understand. The Upper Tribunal’s ruling on 14 January 2025 has brought new clarity, but also raised challenges regarding the application of the Tour Operators’ Margin Scheme (TOMS) in the hospitality and accommodation industries.

At Deeks VAT, we are dedicated to keeping you informed about the ever-changing VAT landscape, ensuring you’re equipped with the insights you need to remain compliant and avoid costly pitfalls.

Background on the Case

Sonder Europe Ltd, a provider of short-term serviced accommodation, operates by leasing residential properties on long-term contracts (2–10 years) and renting them out for short stays averaging five nights. The company initially accounted for VAT under TOMS, calculating tax only on the margin between the rent paid to landlords and revenue from guests.

While the First-tier Tribunal (FTT) originally ruled in Sonder’s favour, HMRC challenged this decision, arguing that Sonder’s operations fell outside the scope of TOMS. The Upper Tribunal (UTT) ultimately reversed the FTT’s decision, siding with HMRC and clarifying key criteria for applying the scheme.

Key Findings by the Upper Tribunal

The UTT’s decision focused on several critical factors that disqualified Sonder’s services from TOMS VAT:

  1. Direct Benefit to Travellers:
    For TOMS to apply, services acquired by the business must directly benefit the end traveller. In this case, the Tribunal found that Sonder’s long-term leases were “in-house” supplies and too remote from the short-term accommodation provided to travellers.
  2. Material Alterations:
    TOMS requires that acquired services be supplied to travellers without material alteration. However, Sonder’s properties underwent extensive changes, such as furnishing and adapting them for short-term stays, which the Tribunal deemed to fundamentally alter the nature of the services.
  3. Reclassification of Supplies:
    Sonder converted VAT-exempt residential leases into standard-rated short-term accommodation. This reclassification further excluded the transactions from meeting TOMS criteria.

Implications for Businesses Using TOMS

The UTT’s ruling has far-reaching consequences for businesses operating in travel and accommodation:

  • Alignment of Services with TOMS: Ensure that services acquired directly benefit the traveller without material alteration.
  • Avoid Modifications: Alterations such as furnishing, decorating, or reconfiguring properties may disqualify services from TOMS VAT.
  • Review Long-Term Leases: Businesses leasing properties long-term for short-term rental purposes should reassess their VAT treatment, as such arrangements may be classified as “in-house” supplies, rather than eligible travel services under TOMS.

What’s Next?

The UTT’s decision has created a precedent that could impact many businesses with similar operating models. Unless Sonder appeals to the Court of Appeal by 14 February 2025, the ruling will stand.

The ruling is not clear and still leaves business owners questioning what does fall within the realms of TOMS. Not only is it not clear, but it could also be devastating for the Serviced Accommodation industry if it does stand.

If Sonder do not appeal HMRC may issue guidance to clarify matters.

This decision highlights the need for travel and accommodation providers to carefully evaluate their VAT treatment and ensure compliance with the increasingly stringent interpretation of TOMS.

At Deeks VAT, we specialise in helping businesses navigate complex VAT regulations. If you’re concerned about how these changes may impact your operations, contact our expert team for tailored advice and support.

Stay Compliant with Confidence

VAT rules are constantly evolving, and staying compliant has never been more critical. This ruling underscores the importance of expert guidance in managing your VAT strategy.

For bespoke advice or further clarification on TOMS VAT, get in touch with Deeks VAT today.

Louis Good

Senior VAT Advisor

m: +44 (0)7469060945

e:  louis@deeksvat.co.uk

w:  deeksvat.co.uk

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