On 14 January 2025, the Upper Tribunal (Tax and Chancery Chamber) delivered a key ruling in the case of HMRC v Sonder Europe Ltd. The decision clarifies the application of the Tour Operators’ Margin Scheme (TOMS) for businesses in the travel and accommodation sector, specifically addressing the VAT treatment of long-term leased properties used for short-term traveller accommodation.
Background: The Case at a Glance
Sonder Europe Ltd, a provider of short-term accommodation, leases apartments from landlords on long-term contracts (2–10 years). These apartments are furnished and rented to corporate and leisure travellers for short stays, typically averaging five nights. Sonder accounted for VAT using TOMS, calculating VAT on its margin (the difference between what it paid landlords and what travellers paid Sonder). HMRC challenged this, asserting that Sonder’s supplies fell outside the scope of TOMS and should instead be subject to standard VAT on the full supply to travellers. HMRC, therefore, assessed Sonder for £252,229 in VAT for periods in 2017 and 2018. The First-tier Tribunal initially ruled in Sonder’s favour, but HMRC appealed and The Upper Tribunal ultimately sided with HMRC, providing much-needed clarity on the scope of TOMS.
Key Findings from the Upper Tribunal
- Direct Benefit Requirement:
The ruling confirms that, for a supply to fall within TOMS, the services acquired by a travel business must directly benefit the traveller. Sonder’s leases from landlords were deemed too far removed from the short-term holiday accommodation supplied to its customers. The long-term leases were considered “in-house” supplies rather than travel services bought in for direct resale. - Material Alteration and Further Processing:
The court emphasised that supplies must be passed to travellers without material alteration or further processing to qualify under TOMS. In Sonder’s case, the leased properties underwent significant changes, including furnishing and reconfiguring for short-term stays. These alterations meant the properties supplied to travellers were not the same as the services acquired from landlords. - Exempt vs. Standard-rated Supplies:
Sonder acquired exempt leases but made standard-rated supplies of short-term accommodation. This transformation, reflecting a shift from landlord agreements to holiday accommodation services, further supported the tribunal’s finding that TOMS did not apply.
Implications for Travel Businesses
The ruling provides valuable guidance for businesses using TOMS, particularly those leasing properties to provide travel or accommodation services. Key takeaways include:
- TOMS Eligibility Requires Alignment: To qualify for TOMS, bought-in services must directly benefit the end traveller. Businesses should carefully assess whether their supply chain aligns with this principle.
- Avoiding Material Alterations: Businesses must ensure that the services acquired are resupplied without significant modification to maintain TOMS eligibility. Significant processing—such as furnishing apartments—could exclude supplies from the scheme.
- VAT Risks for Long-term Leases: Companies leasing properties on long-term agreements for short-term traveller use may face challenges under TOMS, as these arrangements could be seen as “in-house” supplies.
Practical Steps for Compliance
- Review VAT Accounting Practices: Travel businesses should evaluate whether their VAT treatment aligns with the updated interpretation of TOMS, particularly regarding direct benefit and material alteration.
- Engage with Advisors: Businesses with complex supply chains or property leasing arrangements should seek expert VAT advice to avoid unexpected liabilities.
- Document Supply Chains Clearly: Maintaining clear records of how bought-in services are used and supplied will be crucial in demonstrating TOMS compliance.
Final Thoughts
This decision is a reminder of the complexities inherent in TOMS and VAT compliance for the travel sector. The distinction between bought-in services and in-house supplies has significant implications for VAT liabilities. Businesses should take this opportunity to review their arrangements and seek professional advice to ensure compliance with evolving rules.
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