VAT and serviced accommodation provision – it’s a TOMS supply

VAT And Serviced Accommodation

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Xeinadin Group

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In a recent article, we looked at the VAT treatment that could apply to the supply of serviced accommodation here in the UK. It also alerted readers to a VAT case that was progressing through the First Tier Tribunal (FTT), and we can now report that the judgement on that case – Sonder Europe Ltd has been released. 

As we know the First Tier does not create a precedent but certainly does help in the issues under consideration and how they may be regarded. It should also be noted that the Tribunal Judge and President, Greg Sinfield, is someone with a long history in the realms of VAT Liability questions and the interpretation of the legislation. 

Let’s look at the background of this case

Sonder Europe Ltd TC/08852 – July 2023 

Sonder provided accommodation in self-contained apartments to business and leisure travellers. The apartments were leased from third-party landlords and the sublets made by Sonder varied in length from a single night to a month or longer. 

Sonder accounted for VAT under TOMS but HMRC disputed this and raised assessments to collect VAT at the standard rate on the full value of the sublets. The period under review was wholly before Brexit. 

Sonder did not claim to be a tour operator or travel agent but rather that it supplied services for the benefit of travellers which were the kind of services commonly provided by tour operators and travel agents. Sonder described itself as a “hospitality company” or “hospitality business”. It did not provide any transport services or the opportunity to book travel. 

The FTT concluded that HMRC was wrong to assess for VAT on the full values and that Sonder had been correct to use TOMS. 

HMRC approach: 

HMRC argued that renting exempt residential accommodation and subletting that accommodation to travellers does not fall within TOMS. Sonder did not supply the leased residential accommodation but used the leased property to make in-house supplies of travel accommodation. The supplies were made from Sonder’s own resources and Sonder was more akin to a hotelier than a tour operator. Sonder transformed the landlord’s supply of exempt land for residential use into a standard rated supply of hotel accommodation. Furthermore, where Sonder leased unfurnished accommodation and added furnishings, it should be seen to have made a ‘material alteration’ or applied ‘further processing’ to the service acquired, thus invalidating the use of TOMS. 

What the Tribunal decided: 

The FTT held that there is no requirement in either EU or UK law that the bought-in services must be identical to the supplies made to the traveller. Therefore, Sonder did not need to buy-in hotel or holiday accommodation to fall within TOMS. It was sufficient that it acquired services which it re-supplied for the benefit of a traveller. 

Looking at other influencing cases particularly, the Madgett & Baldwin and iSt ECJ decisions, these require the terms ‘tour operator’ and ‘travel agent’ to be given broad interpretations. It is clear from those decisions that businesses which are not tour operators or travel agents are obliged to use TOMS, when the normal conditions for the scheme are satisfied. The FTT commentary concluded on this point: 

“Any business that provides services which are the same as or comparable to those provided by travel agents or tour operators within the normal meaning of those terms is itself a travel agent or tour operator”. 

The FTT considered that the provision of accommodation in self-contained apartments is the type of service commonly provided by a travel agent or tour operator. 

The FTT dismissed HMRC’s arguments that Sonder made a material alteration or further processing of the services acquired. This is a point that often comes up in determining the VAT treatment in this regard therefore it is worth noting the detail on this point: 

“It seems to me to be clear from the nature of the TOMS that “material alteration or further processing” must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services. It would be absurd as well as impracticable if any minor change or processing excluded a bought-in supply from the TOMS. In order to be excluded from the TOMS, I consider that the alteration and processing must change the goods or services supplied so that what is supplied by the tour operator cannot be described in the same terms as the items acquired”. 

The FTT also suggested that the UK concepts of material alteration and further processing are not to be found in EU legislation. This did not matter in this case – as the FTT concluded that there was no material alteration or further processing anyway – but it could be relevant in other cases. 

A final note of interest from the FTT commentary is the determination that the use of TOMS is not limited to international scenarios, i.e it can apply where the services in question are all enjoyed within one country. 

Sonder was, therefore, correct to use TOMS as the means to account for VAT on its supplies. 

Where does this leave serviced accommodation suppliers?

The case taken by HMRC would be further evidence of their general direction of travel to limit the use of TOMS in the UK – indeed, as the UK are the only non-EU operator of TOMS there is the question as to whether we will see TOMS removed entirely by HMRC. 

This dislike is because the scheme effectively enables an organisation that has incurred no VAT on the costs of an incoming supply (exempt residential leases) to account for VAT only on the margin they make from their taxable onward supply (serviced accommodation). 

A further Tribunal Case due on the liability question: 

Providers of serviced accommodation should continue to be alert to the challenges that they could face from HMRC in this regard. There is another case due to appear on the VAT liability of the provision of such services – RealReed Ltd. 

The case due at Tribunal relates to the liability of the supply as the provider in question had treated the supply as VAT Exempt whereas HMRC (eventually) took the view that the supply was taxable. 

We use the word “eventually” as a result of reading the High Court case that the taxpayer has just lost relating to the fact that they had received a number of VAT inspections over the period and the VAT liability of their supply had not been questioned. They had complained to HMRC on the matter when the assessment was raised and, as HMRC dismissed their complaint, they resorted to the High Court for a Judicial review of that dismissal. 

With a VAT liability arising of £4.8m it is understandable why they would take all steps available to them in this regard. The High Court case on the judicial review was not there to determine the actual VAT liability of the supply being made – that is the role of the FTT. However, the outlining the history of the case the nature of the supplies being made and the relevant VAT legislation is explored. 

It will be interesting to see if the taxpayer has more success at FTT on the actual liability question at issue – the application of a VAT Exemption to their supplies of residential accommodation.

VAT – a simple tax?

What started as a consideration of the application of TOMS as a means for VAT accounting on supplies of serviced accommodation has extended into a wider commentary on the liability of supplies in general in this area. This is often the case with any question relating to VAT. 

VAT is a tax with layers of complexity, and this remains true in a range of property-related areas and that’s before we consider interactions with regulations around TOMS, the Capital Goods Scheme and Anti-Avoidance rules relating to options to tax. 

Whatever your area of property operation, from developers to providers of commercial or residential facilities, operating in the Travel sector or elsewhere, should VAT issues arise where you’d like support, get in touch with the VAT specialist team here at Xeinadin.

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