June 24, 2025
Article
We wrote in a previous edition about a case, involving a company called Sonder, where the Tax Tribunal decided the business was able use the Tour Operators Margin Scheme (TOMS).
Sonder, does not own its own properties but typically leased residential properties from the freeholder on terms of 2-10 years. VAT was not charged on the leases. Sonder then let the properties to holiday makers on a short-term basis.
Sonder thought it could use TOMS and as a result would only pay VAT on its profit margin. As there was no VAT to reclaim on their lease costs, but there was VAT to pay on the short-term holiday lease income, this saves a lot of VAT.
TOMS only applies if accommodation is bought in and resupplied without material alteration. While Sonder was initially successful at the First-tier Tribunal (FTT) this decision has since been overturned by the Upper-tier Tribunal (UTT). While the FTT focussed on nature of physical changes the UTT gave more weight to the legal and contractual position. Their decision was that hiring in residential accommodation on a long-term basis and reletting it as holiday accommodation, was enough of a material alteration to prevent them using TOMS.
It is understood Sonder is seeking permission to appeal the decision and the final outcome therefore remains uncertain.
It would be prudent for businesses currently operating TOMS in respect of bought in accommodation to review their arrangements against the Sonder decision. Businesses who lease properties on long-term arrangements but resell on a short-term basis would be well advised to consider their position.
If Sonder are unsuccessful in challenging the latest position for TOMS to be successfully applied it will be necessary to align the bought in and resold services, ensuring what is bought in directly benefits the traveller. Significant changes to property, including furnishing or decoration should be avoided.
Please contact us if you would like to discuss the implications for your business.