Sonder Fights Court Ruling Over TOMS Eligibility, Seeks Appeal

Sonder Europe Ltd is appealing a court decision that ruled its serviced apartments didn't qualify for the Tour Operators Margin Scheme (TOMS) and has requested permission to escalate the case to the Court of Appeal.

The Upper Tier Tribunal (UTT) earlier determined that the rights Sonder provided to its guests (such as short-term stays) were "materially different" from the long-term residential leases it held with landlords. (TOMS requires services to be supplied to travellers without significant modification).

That distinction disqualified the holiday accommodation company from applying TOMS, which would have allowed it to pay VAT only on the margin (the difference between what they charge customers and what they pay for the accommodation) rather than on the full sale price.

Timeline of the Case

Summary

What is TOMS?

TOMS is a special VAT system in the UK and EU for businesses that buy and resell travel services such as hotel stays and vacation packages. VAT is only charged on their profit margin, and they cannot reclaim VAT on those purchases.

In a normal VAT system, businesses can claim back the VAT they pay on goods and services they buy for their operations. But, under TOMS, since VAT is only charged on the profit margin (not the full sale price), businesses lose the ability to reclaim VAT on their costs.

That trade-off simplifies VAT reporting but can also buoy costs in case a business has high VAT expenses on purchases.

Business Model

The Nasdaq-listed company leases residential properties from third-party landlords on long-term agreements meant for residential use. It then rents them out to guests for short-term stays with bare-bone services like online check-ins and outsourced cleaning. 

Why Sonder is Appealing

Sonder is appealing the decision because it argues its business model is similar to those of previous cases (for example, Van Ginkel and Alpen chalets), where companies acquired accommodation and provided it to travellers without material alteration. The rulings in those cases support Sonder’s position that its supplies fall within TOMS.

Moreover, being excluded from TOMS could hurt its finances and operations. Here’s how:

• Higher Taxes - Without TOMS, Sonder has to pay VAT on the full price of its stays, not just the profit margin, boosting its tax bill.
• Complicated VAT Rules - TOMS makes VAT reporting easier. Without it, Sonder must deal with more complex accounting and paperwork.
• Rising Costs - Managing VAT without TOMS means Sonder may need to spend more on administrative work, yanking up operational expenses.

Fighting to reverse the ruling and qualify for TOMS would soften its VAT burden and simplify tax compliance.

Key Arguments and Strategy

Sonder is expected to challenge the Upper Tribunal’s ruling on legal and procedural grounds, questioning whether the decision followed established principles, how the Tribunal interpreted TOMS and what the ruling means for VAT compliance across the industry.

Was the Ruling Fair?

Sonder may argue that similar companies received different treatment in past cases, making the ruling unfair. It could also claim the Tribunal overlooked key evidence—such as how Sonder’s leasing model benefits travellers—which might have influenced the outcome.

Sonder’s appeal will likely focus on two main points:

Sonder may also invoke the economic substance over legal form principle, citing case law like Westmoreland Investments Ltd v MacNiven, to argue that VAT treatment should reflect the commercial reality of its business.

Finally, it could challenge the proportionality of VAT application, questioning whether VAT should apply to full revenue instead of just the margin, as TOMS was designed to simplify tax calculations.

Why The Appeal Matters

Even after Brexit, UK VAT laws still follow many EU principles. Sonder may argue breaking from established EU interpretations creates uncertainty for businesses operating across borders. Matching EU VAT rules could be a key part of its legal strategy.

The Bigger Industry Impact

The case could reshape how VAT applies to the serviced accommodation sector. If the ruling stands, other operators might face higher taxes and more operational hurdles. Sonder’s appeal could therefore be framed as an effort to bring clarity and fairness to the industry.

Rethinking the Tribunal’s Classification

A big problem is how the Tribunal classified Sonder’s leases. It ruled its long-term leases were "internal supplies" rather than inputs for resale, affecting their VAT treatment under TOMS. Sonder may argue its leases are essential to providing short-term stays and should be recognised as such.

The Tribunal may also have overlooked business realities. Sonder could argue securing long-term leases and furnishing properties isn’t an optional extra but a necessity to meet customer expectations.

Strategic Reasons to Appeal

Even if Sonder doesn’t win outright, appealing could still be smart. It would allow it to:

• Keep its current VAT treatment under TOMS while the case plays out.
• Adapt its business model based on possible rule changes.
• Negotiate settlements or push for policy clarifications on backdated VAT liabilities.

What Does All This Mean for Businesses?

The UTT's ruling has left businesses in the serviced accommodation sector uncertain about how to follow TOMS rules confidently. Companies that made changes to curb risks are now second-guessing their decisions.

Although Sonder's appeal may produce a better outcome for all, the final decision remains uncertain. And the appeal is just getting started. First, the Court of Appeal must approve it, and even then, businesses will have to wait several months for a hearing and a final ruling on how "material alteration" should be interpreted.

If your business is affected by TOMS, here's how to stay on top of things:

Conclusion

Sonder’s appeal is part of a bigger conversation about how VAT should apply to the serviced accommodation industry. Challenging the ruling could mean tax rules that reflect modern business models. The appeal process also gives the company a chance to rally industry support.

Winning won’t be easy, however, and the road ahead is uncertain. But if it succeeds, it could bring much-needed clarity on TOMS and even produce changes in VAT policy for the sector. Whatever the outcome, businesses in this space need to be ready for possible changes in how VAT is applied.