The recent Upper Tribunal decision in HMRC v Sonder Europe Ltd (14th January, 2025) has caused a lot of concern within the serviced accommodation industry. By overturning assumptions about the scope of the Tour Operators’ Margin Scheme (TOMS) for VAT, this ruling opens the door to significant financial challenges for operators and property owners alike.
Tour Operators’ Margin Scheme (TOMS)
TOMS was introduced to simplify VAT accounting for businesses in the travel and tourism sector.
Under TOMS, VAT is accounted for only on the margin (i.e., the difference between the cost of the service to the tour operator and the price charged to the customer), rather than on the full sale price. It applies to businesses, such as travel agents and tour operators, that buy and resell travel services (e.g., accommodation, transport, or package holidays) as principal, rather than as an agent for a client, and was designed to ensure VAT is accounted for in one country, avoiding the need for multiple VAT registrations.
A major shift in VAT rules
The result of the Upper Tribunal’s ruling has clarified that businesses leasing residential properties on a long-term basis, modifying them, and then offering them as short-term lets may now face standard VAT rates, no longer benefitting from the simplified accounting TOMS provides – representing a substantial cost increase that will no doubt have a great impact on the industry.
With this revaluation of TOMS, operators could face a 20% rise in VAT costs, an obvious concern for businesses.
The Sonder Case – what happened?
Sonder leased residential properties under long-term agreements from third-party landlords, refurbished them, and sub-let them as short-term stays. HMRC challenged Sonder’s claim that its supplies fell within the scope of TOMS, and therefore shouldn’t benefit from its VAT simplification. The First-tier Tribunal favoured Sonder’s view.
However, HMRC successfully appealed, with the Upper Tribunal ruling that Sonder’s operations did not meet the scheme’s criteria. Key reasons included the long-term leases Sonder took on not directly benefitting travellers, and the leased properties being modified, and therefore going against the minimal processing requirement of the scheme.
Sonder’s actions were consequently deemed incompatible with TOMS.
Potential impacts on the industry
The implications of this ruling extend beyond operators, who may find the cost increase challenging when competing with hotels, a key selling point for many businesses. Property owners may face reduced demand for long-term leases if operators are forced to rethink their strategies to deal with growing costs.
Guests, too, could see higher prices for short-term lets if businesses have to pass these costs on, reducing the appeal of this type of accommodation.
Ultimately, the degree of impact will depend on specific business models and contractual agreements with landlords.
What happens next?
Sonder could appeal to the Supreme Court, which may temporarily preserve the current assumed VAT treatment, providing operators and owners with time to adjust to these heightened costs. However, a failed appeal might cement this ruling, making future challenges to HMRC’s stance even more difficult.
No doubt operators and property owners will be exploring ways to mitigate the impact of this verdict.
