Upper Tribunal Reverses Sonder Europe’s TOMS VAT Wins

On 14 January 2025, the Upper Tribunal (Tax and Chancery Chamber) delivered a pivotal decision in the case of HMRC v Sonder Europe Ltd, bringing clarity to the application of the Tour Operators’ Margin Scheme (TOMS) in the context of the travel and accommodation industry. Sonder Europe, a provider of short-term serviced accommodation, leased residential apartments on long-term agreements (ranging from 2 to 10 years) and rented these to travellers for short stays averaging five nights. The company accounted for TOMS VAT, calculating VAT on its margin—the difference between the rent paid to landlords and the revenue received from travellers.

Initially, the First-tier Tribunal (FTT) ruled in Sonder’s favour, agreeing that its services fell under TOMS. However, HMRC appealed this decision, arguing that Sonder’s operations did not meet the criteria for the scheme. The Upper Tribunal (UTT) ultimately reversed the FTT’s decision, siding with HMRC and providing much-needed guidance on the scope and application of TOMS.

Summary of Upper Tribunal Findings

The Upper Tribunal highlighted key requirements for the application of the Tour Operators Margin Scheme (TOMS). Firstly, it reaffirmed that services acquired by a travel business must directly benefit the end traveller. In Sonder’s case, the long-term leases obtained from landlords were deemed too remote from the short-term holiday accommodation provided to guests, with the Tribunal classifying these leases as “in-house” supplies rather than services purchased for resale. 

Secondly, TOMS requires that services be supplied to travellers without significant modification or processing. Sonder’s leased properties underwent substantial changes, including furnishing and adaptation for short-term use, which transformed the nature of the properties and disqualified them from TOMS VAT.

Finally, Sonder’s operations involved converting exempt residential leases into standard-rated short-term accommodation. This shift further indicated that TOMS was not applicable, as the transactions did not align with the scheme’s requirements.

The Decisions in Detail

The FTT initially ruled in Sonder’s favour, asserting that the company’s activities did not involve material alteration. The judge held that TOMS applied as long as the physical nature of the properties remained unchanged. According to the FTT, alterations such as furnishing or cosmetic changes were reversible and did not constitute a significant transformation.

The UTT disagreed, emphasising that material alteration is not limited to physical changes but also includes legal and contractual modifications. The Tribunal ruled that Sonder’s long-term leases, which included responsibilities such as maintenance, utilities, and furnishing, represented a fundamentally different “bundle of rights” compared to the short-term holiday accommodation offered to travellers. This divergence rendered TOMS inapplicable.

Implications for TOMS VAT 

The UTT’s ruling has far-reaching implications for travel and accommodation businesses using TOMS:

• Alignment of Services: Businesses must ensure that the services they acquire directly benefit the end traveller and align with the requirements of TOMS.
• Avoiding Material Alterations: Any significant modifications to acquired services, such as furnishing or reconfiguring properties, may disqualify them from TOMS.
• Caution with Long-term Leases: Companies using long-term leases to provide short-term accommodation should reassess their VAT treatment, as these arrangements might be considered in-house supplies rather than eligible travel services.

Future Considerations for TOMS VAT

The UTT’s decision establishes a precedent that could affect other businesses operating similarly to Sonder. Unless Sonder appeals to the Court of Appeal by 14 February 2025, the ruling will stand, requiring businesses to reconsider their VAT practices. This case highlights the importance of cautious application of TOMS VAT and the need for businesses to seek expert advice to mitigate VAT risks.

While the decision provides some clarity, uncertainties remain regarding the precise degree of materiality required to exclude supplies from TOMS. Businesses must evaluate their arrangements carefully and stay informed about ongoing legal developments in this area.

Update: Sonder is appealing the UTT'S decision and has requested permission to escalate the case to the Court of Appeal.