VAT – Good news for serviced accommodation providers

• Sonder Europe Ltd v HMRC decision

The provision of holiday accommodation is standard rated, 20% for VAT. If TOMS can be used then the amount of VAT payable is significantly reduced because, under TOMS, you pay VAT only on the margin, which is the difference between the selling price and the direct costs of the accommodation, including rent, cleaning etc. Under TOMS, VAT is due at 1/6^th of the margin where the accommodation is in the UK.

The Tribunal has ruled that, where you rent in or lease in accommodation for any period of time (e.g. a season or a couple of years) from a third party and then rent out that accommodation as holiday accommodation, TOMS applies. HMRC argued a number of points to the Tribunal to try and persuade them that TOMS cannot apply in these circumstances and the Tribunal rejected all HMRC’s points. The Tribunal:

• Ruled that Sonder was a tour operator because it provided services that were identical or at least comparable to those of a tour operator
• Agreed that accommodation supplied on its own can fall within TOMS, i.e. there is no need to supply further travel services with accommodation for TOMS to apply
• Agreed that the addition of furniture, repairing damage or decorating did not constitute material alteration. HMRC said that material alteration had occurred so that what was rented in was not the same as what was rented out. If there had been material alteration then TOMS could not apply. However, note that Sonder spent a relatively small amount on maintenance and repairs – £20,000 in comparison to £1.5m paid in rents to landlords.
• Decided that the apartments themselves were not materially altered despite their tax status changing from exempt land for residential occupation to holiday accommodation. The Tribunal said that material alteration ‘must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services.’ Although the Tribunal did not appear to consider the addition of gas, electricity, broadband, Sky etc., we think that the Tribunal’s comments here, and also regarding furniture, would apply to these utilities and services. The Tribunal said that changes that can be reversed, such as painting a wall or removing furniture, are not material alteration or processing.

The good news is that there is no decision to prevent you applying TOMS in serviced accommodation if your situation is on all fours with Sonder’s.

HMRC have 56 days to decide whether to appeal the decision to the Upper Tier Tribunal. If they do, then we await the next round of the battle!

You can only go back four years to make a claim for overdeclared VAT, so, if you are not already using TOMS, you should consider whether you need to make a claim applying TOMS and then potentially stand behind Sonder’s appeal in the courts to protect your position.

HMRC may decide not to appeal. First Tier Tribunal decisions are not determinative so HMRC may still question the use of TOMS for R2R and they could decide to take another case in the future. Alternatively, they may change the UK VAT law to exclude these types of supplies from being within TOMS.

Please contact Sue Rathmell, VAT Partner at MHA, if you would like any help.