The Upper Tier Tribunal (“UTT”) case of Sonder Europe Limited may have implications for suppliers of Serviced and Holiday Accommodation.
Some providers of such accommodation have used the earlier decision in the First Tier Tribunal (“FTT”) of Sonder Europe Limited to justify their use of the ‘Tour Operators’ Margin Scheme’ (or ‘TOMS’).
In doing so they have accounted for VAT on the margin that they have made, rather than the full income received from their customers.
However, the UTT has now reversed the decision made by the FTT.
The new decision is important from a VAT advisor’s point of view as it helps clarify when the use of TOMS is appropriate.
The scope of TOMS has arguably been widened beyond the original intention of the legislation – including for example its use in respect of apps booking taxis (the recent Bolt case).
In the Sonder Europe Limited case, the owners of property had granted long term leases in respect of accommodation to Sonder. These leases were made on a ‘VAT Exempt’ basis.
Sonder then let the properties on a short-term basis as holiday accommodation or serviced accommodation similar to a hotel, hostel or inn.
These supplies were ‘Taxable’ but Sonder only accounted for VAT on the margin that it had made.
The FTT agreed with Sonder’s assertion that the accommodation had not been ‘materially altered’ (one of the conditions of the UK legislation for the use of TOMS) and that therefore its VAT accounting was correct.
However, the UTT considered that the FTT had been too concerned with the actual physical nature of the properties and whether small scale refurbishments and payment of utilities, cleaning and council tax can be said to have ‘materially altered’ the onward supply of the properties themselves.
Instead, the UTT considered the original EU legislation – not least because the income in question had been received by Sonder whilst the UK was part of the EU. However, this also allowed the UTT to consider what the UK intended when it implemented its own legislation in respect of ‘material alteration’.
The UTT found that for a supply to be said not to be ‘materially altered’ that it must have been for the ‘direct benefit’ of the end customer.
Though the long lease of the property allowed the supply of the holiday accommodation, it was an “overhead” allowing Sonder to make its own separate supply rather than something that Sonder resupplied directly to the customer in an unaltered form.
In other words, from a VAT perspective, Sonder had received an ‘interest in land’ from the property owners whereas what it had resupplied was not the same, as it supplied the short-term letting of holiday accommodation with additional services (not a direct resupply of an interest in the land it had received).
This logic makes sense not least when you consider that the long-term lease of the property is ‘VAT Exempt’ whereas the supply of the holiday accommodation is ‘Standard Rated’ and so from a VAT perspective there must be a good argument that something different has been resupplied.
On this basis the supply had indeed been ‘materially altered’ so that the use TOMS was not appropriate, and VAT became due on the full income received from the customer.
Further Action
Where businesses have put a similar structure in place in order to use TOMS in respect of the supply of holiday or serviced accommodation then it is likely that they will require further advice.
Our VAT Team can assist in respect of these matters. Please contact us for more information.