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As a result of a recent win at the First Tier Tribunal (“FTT”), potentially significant VAT savings can arise for providers of serviced apartment accommodation to short-stay business and leisure travellers. This is because the judgement confirmed that, if structured correctly, VAT need only be accounted for on the margin made per the Tour Operators Margin Scheme (or “TOMS”).

The case

The appeal was taken by Sonder Europe Limited who acquired (via long-leases) vacant apartments from unconnected third-party landlords and then re-sold them as short-term accommodation to short-stay visitors (used for either leisure or business purposes). HMRC took the view that VAT at the standard-rate of 20% ought to be due on the full selling price as the bought-in supply of the units (via the leases) were materially different when sold-on and therefore the default should be to treat the supplies as being akin to those provided in a ‘hotel, inn, boarding house, or similar establishment’  (Nb. Such supplies being carved out of the exemption per Item 1(d), Group 1, Schedule 9, VATA 1994).  However, the FTT agreed with Sonder’s assertions that:

  1. It qualified as a “Travel Agent or Tour Operator” for the purpose of TOMS.
  2. It’s cosmetic alterations to the apartments (e.g. re-decoration or providing certain soft furnishing’s) did not ‘materially alter’ the arrangements and therefore what was being supplied was a TOMS-qualifying ‘designated travel service’.

The outcome

The provision of short-stay serviced apartments now potentially falls under the scope of TOMS.  This means that whilst input tax incurred on direct costs of providing the units (e.g. third-party booking platform providers, cleaning providers etc.) is not recoverable, output tax is only due on the profit margin made (as opposed to the full sales price). This can result in significant VAT savings for operators.

While decisions from the First Tier Tribunal aren’t necessarily conclusive, they should be considered as informative and where a business’s background facts are similar, often persuasive.

What does this mean for serviced accommodation providers?

If your business buys-in hotel-type accommodation and then sells this on without ‘material alteration’ and it pays VAT on the full selling price under the normal VAT rules, you might have overpaid VAT. In such cases, you may be able to submit a claim going back up to four years to recover the VAT overpaid to HMRC.  Alternatively, it may be possible to re-structure your delivery model on a prospective basis to take advantage of the decision in Sonder.

By way of update, HMRC have been given leave to appeal the FTT decision to the Upper Tier Tribunal (UTT) and this is now scheduled to be heard in December 2024. Any protective claims submitted now (whilst likely to be rejected by HMRC) should be stood behind this lead case.  It should be noted that taxpayers are limited to a four-year statutory time limit for submitting claims before they go ‘out of time’. Due to the mechanics of the TOMS’ annual adjustment calculation requirement, delaying action could result in forfeiting a year’s claim.

If you would like to discuss this case or any other VAT related matter, please do not hesitate to contact our resident expert, Richard Smith.


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