TOMS Torment

HMRC have won the highly anticipated Upper Tribunal against Sonder.  Sonder were successful at the First Tier Tribunal (FTT) in arguing that its supplies of holiday accommodation fell under the Tour Operators Margin Scheme (“TOMS”).  Sonder bought in furnished and unfurnished accommodation on 2-10 year leases, and repackage those into short-term lets.  The TOMS scheme allowed them to reduce the VAT payable, by only declaring the output tax payable to HMRC on the margin – i.e. the difference between the selling price and the exempt rental costs.  This VAT accounting model would be beneficial to Sonder as most of the costs incurred by Sonder would be VAT exempt (hiring flats).

The FTT had found in favour of Sonder and agreed TOMS could apply.  In its view, the fact many apartments were unfurnished was irrelevant, and that Sonder’s improvements were merely superficial and cosmetic in nature.  They found that the “… TOMS Order states that goods or services acquired for the purposes of the tour operator’s business and provided for the benefit of a traveller without material alteration or further processing are within the scope of the TOMS. In neither case is there any further requirement that the bought-in supplies must be identical to the supplies provided by the tour operator to the traveller.”

This decision was reversed as the Upper Tribunal found in favour of HMRC.  They found that “the services supplied by the landlord to Sonder were not for the direct benefit of Sonder’s own customers and the services were not supplied by Sonder for the benefit of the traveller without material alteration and further processing.  In short, the services supplied by Sonder to the traveller were its own in-house supplies, which therefore fall outside the ambit of TOMS.” 

So what does this all mean, does this seem correct, and what’s the impact?

In short, unless this is overturned at appeal, which would not be a quick process, VAT should be due on the full selling price for all short-term AirBnB style accommodation.  This was always HMRC’s position and will remain such. 

I appreciate that many were hoping to see Sonder win this one, and I understand why, but I do believe the decision is a correct interpretation of the VAT guidance on this.  Sonder were materially altering the supply – the owners were leasing property on a 2-10 year lease, they were not providing holiday accommodation. 

In terms of the VAT Notice 709/5 Section 7, this is known as an “in-house supply”.  HMRC give examples where you own or rent supplies – for example you could charter a cruise ship or lease a hotel, and then use these assets to provide your own holiday accommodation.  HMRC’s notice is clear that these would be considered material alterations, and this seems similar to Sonder’s business model.    

This will be disappointing to the accommodation sector, but sees no changes – hopefully the Government will see some sense in the future and encourage travel and tourism through the application of the reduced rate.  Where there could be an impact is on taxi drivers, and it will be interesting to see the effect this has on the forthcoming VAT case of Bolt.

In early 2024 Bolt won its case at the FTT, also arguing that TOMS applied to the sale of taxi journeys.  It was buying in and reselling taxi journeys without material alteration.  Despite Sonder’s loss, this may actually boost Bolt’s case.  Here it may be argued that the taxi drivers were actually providing the same service – so there was no material alteration.  Bolt made their money by negotiating rates, and reselling – which could fall neatly into TOMS with VAT only due on their margins.

There have been various tax cases on taxis, including Uber.  For example, some were considering whether the drivers were self-employed, or rather were employees and entitled to sick pay, holiday pay, pension contributions etc.  It will be interesting to see if this is argued by HMRC in the VAT appeal, as it would not be possible to have TOMS supplies that are fulfilled by your employees – they too would be deemed to be an “in-house supply” on the same grounds as above.

Will HMRC even argue this?  If they don’t like the outcomes, will HMRC simply scrap TOMS?  The theory was that TOMS consolidated 28 different EU VAT regimes into one simplified method.  Now the UK has left the EU, do we really need it?

There are some interesting times ahead, and this is an area we’ll be keeping an eye on.