Big win for HMRC in Sonder Europe Ltd - TOMS VAT case

The outcome of the case between HMRC and Sonder Europe Ltd is pivotal for the VAT treatment of short-term accommodation rentals.

In January 2025, the case of HMRC v Sonder Europe Ltd brought greater clarity to the application of the Tour Operators’ Margin Scheme (TOMS) for the serviced accommodation sector. It affects those people who rent out holiday accommodation and whether the supply of that accommodation is within TOMS.

For property owners operating a business in the short-term holiday accommodation sector, it’s essential to understand how this case was concluded.

So, let’s start with the basics and then work up to how this case may affect you if you rent out holiday accommodation.

What is The Tour Operators Margin Scheme?

The Tour Operators Margin Scheme (TOMS) is designed to simplify the Value Added Tax (VAT) process for travel agents and travel businesses. It is a special VAT scheme for companies that purchase and resell travel accommodation for residential occupation, such as hotel accommodation and short-term residential rental accommodation. It also affects some other services supplied by these companies.

The TOMS scheme enables tour operators to manage their profit margin and comply with tax regulations.

The Sonder Europe LTD vs HMRC TOMS VAT case

Sonder Europe Ltd (Sonder) is a provider of short-term serviced accommodation and long-term self-contained leased residential apartments in the UK from third-party landlords.

The accommodation was rented on a short-term basis, ranging from 1 night to 1 month, with an average stay of 5 nights. The longer-term agreements ranged from 2 to 10 years.

The apartments were furnished by Sonder Europe and some were unfurnished.

For short-term lets, licences were then granted to travellers to occupy the apartments for periods ranging from a single night up to a month, with the average stay being 5 nights.

The First-tier Tribunal (FTT)

Sonder Europe considered and treated its supply of the accommodation as being within TOMS and successfully won a first-tier tribunal by persuading them that applying TOMS was correct.

HMRC disagreed and appealed to the first-tier tribunal outcome as it argued that TOMS did not apply to Sonder’s supplies of holiday accommodation. HMRC also argued that the accommodation purchased by Sonder should not be designated as a travel service, as it was not a transaction directly benefiting the traveller. HMRC believed that it was, in fact, a VAT-exempt supply of land.

The Upper-tier Tribunal (UTT) ruling

The upper tribunal ruled in favour of HMRC for VAT purposes.

They determined that the internal repairing and insuring leases (IRI leases) acquired by Sonder Europe should not be classified as travel services intended for the direct benefit of the travellers.

The tribunal concluded that the IRI leases were long-term property interests that Sonder furnished, converted, and modified into short-term holiday accommodation.

The Upper Tribunal concluded that the transformation of the IRI leases from the acquired state into short-term, fully furnished accommodation constituted a material modification of the acquired services. This meant that TOMS could not apply.

The Upper Tribunal overturned Sonder’s win at the FTT and instead ruled that TOMS did not apply.

Implications for TOMS VAT treatment

The Upper Tribunal’s ruling has far-reaching consequences for the tax status of supplies provided by serviced accommodation providers, temporary accommodation, and the travel industry.

The ruling in the HMRC vs Sonder Europe case means that VAT at the standard rate is due on the supply of holiday accommodation on the full value of the supplies made to the traveller. This will have consequences for similar businesses that have calculated VAT due on a margin basis.

Key findings and implications for travel businesses operating under TOMS

• Alignment with the principle of ’directly benefiting the traveller’: To qualify for TOMS, purchased services must directly benefit the end traveller. You should assess whether your supply chain aligns with this principle and if not, VAT should be charged at the standard rate.
• Material alterations should be avoided: You should ensure that any accommodation acquired for resupply is not significantly modified to retain TOMS eligibility. Materially altered accommodation, such as furnishing apartments, could exclude them from TOMS.
• Risks associated with long-term leases: If you lease properties on long-term agreements for short-term use by travellers, you are likely to face challenges under TOMS, as these could be viewed as “in-house” supplies.

Our advice

Our advice to anyone renting exempt residential accommodation under the TOMS VAT scheme and providing travel services is to:

• Review your VAT treatment and accounting practices with your accountant and tax advisor. Your VAT returns should be reviewed, as you may find you have an outstanding VAT liability if you have wrongly applied TOMS VAT in the past.
• Engage accountants, such as dns accountants, who understand the complexities of VAT treatment under the TOMS scheme to review past practices and ensure your ongoing compliance. Seek expert advice.
• Keep clear records of the services supplied and how they are then reused and rented. Then, if required, you can prove compliance with TOMS compliance.

Contact dns today

At dns accountants our property team and tax experts are experienced in both VAT and the application of the TOMS scheme. Third-party landlords, tour operators and travel businesses can seek our help and advice on the application of TOMS and other tax and accounting questions.

Contact dns today on 03330600706 or email us on enquiry@dnsaccountants.co.uk.

Speak with an expert

Any questions? Schedule a call with one of our experts.

Book a call