Colin Laidlaw, VAT partner at Galloways Accounting, provides an updated overview of what the Upper Tribunal decision on the Sonder case means for the VAT treatment of serviced accommodation.
The VAT position in respect of serviced accommodation has been a subject of debate with HMRC. In a previous article in March 2024, the latest VAT position following the case of Sonder at the VAT First-tier Tribunal gave hope that there might be some welcome VAT treatment available. However, the saga continues as a further appeal on this case has been heard, throwing the whole thing on its head again. It seems we are no closer to reaching a conclusion.
The case so far
HMRC’s stance is that the provision of holiday or serviced accommodation is subject to VAT at 20 per cent on the full price. Some providers however have used a VAT scheme known as the Tour Operators Margin Scheme (TOMS) so that VAT is only due on the margin, meaning that the main cost of buying in the property (which is exempt from VAT) can be offset against income before calculating the VAT due, creating a significant VAT saving.
As previously reported, in January 2023 HMRC challenged this treatment in the First-tier Tribunal case of Sonder (Sonder Europe Limited vs HMRC [2023] UKFTT 610 (TC)). The judgement, released in July 2023, found that TOMS was applicable.
However, HMRC appealed, and the case was heard in the Upper Tribunal in December 2024 (HMRC vs Sonder Europe Limited [2025] UKUT 14 (TCC)) with the decision released in January 2025.
The Upper Tribunal, overturning the First-tier Tribunal decision, decided that TOMS does not apply. The decision relied on the UK VAT legislation which states that the supply must be made to a traveller “without material alteration” ie it found that Sonder changed the nature of the supply – it leased the accommodation on long leases but let it out as short-term holiday lets. In addition, in some cases, Sonder furnished the accommodation before selling it on.
Whilst the EU TOMS legislation and the UK TOMS legislation have different wording, the Upper Tribunal read them as meaning the same thing. EU legislation refers to supplies made “directly for the benefit of a traveller” whereas UK legislation refers to “supplied for the benefit of a traveller without material alteration or further processing“.
Why is this new decision important?
A First-tier Tribunal decision, whilst persuasive, does not create a precedent in law and as such, the decision in 2023 could not be relied on by operators. Some operators may have chosen to follow the decision and change their VAT accounting and may have submitted protective claims with HMRC for overpaid VAT.
An Upper Tribunal decision however does create a precedent and is binding on all UK taxpayers (and HMRC). In the absence of a further, higher decision, operators will be expected to review their VAT accounting and account for VAT under the normal rules, not TOMS.
Is this the end?
No, unfortunately not. At the time of writing, we understand that Sonder has applied for permission to appeal to the next level, the Court of Appeal, so the position may not be final. Permission still has to be granted but, given the ambiguity between UK and EU legislation and the wider implications across the sector, there is a strong possibility that it will be. If that’s the case, it could be well over a year before a Court of Appeal hearing.
What’s next?
In our previous article the First-tier Tribunal case of Bolt, a taxi operator, was discussed. Unlike Uber, which the Courts agreed was acting as a principal for its drivers, Bolt successfully argued that its supplies could be accounted for under TOMS, creating further ambiguity as to the scheme’s operation. This is currently only a First-tier Tribunal decision but is being appealed to the Upper Tribunal, and the latest Sonder decision is likely to have an impact on the judgement.
Also in 2024, HMRC announced that they would be undertaking a review on TOMS – there has been recent clarification in respect of B2B wholesale supplies but nothing further. The Sonder and Bolt decisions may mean that HMRC will undertake a review sooner rather than later. The UK is no longer bound by the EU, so any review could potentially result in a change in the rules, regardless of whether past decisions are considered right or wrong.
Conclusion
It was hoped that this decision might have brought clarity but if anything, it, and other cases, has just thrown more doubt on the position.
For those that haven’t accounted for VAT on the full selling price, now that we have a binding decision, there is a risk of an historic VAT exposure. Whilst the position is uncertain and without any specific guidance from HMRC, one might decide not to do anything pending any potential appeal. But we cannot anticipate a future decision (the law does not look forward), so we expect that HMRC will be looking to target affected businesses and issue protective assessments to preserve time limits. Assessments can go back up to four years and can include interest and potential penalties, depending on individual circumstances. An appeal to the Tribunal would need to be submitted to counter any assessment, even if there is a later pending appeal by Sonder (or HMRC).
Unfortunately, the route to a conclusion is likely to be slow as there is still the possibility of a further appeal to the Supreme Court. It would be advisable to address the position upfront rather than wait for HMRC to take action.
So, watch this space but don’t do nothing – whilst this is a fluid position, if you have income which is derived similarly to the model adopted by Sonder you should review your position, possibly seeking advice on the next steps, and taking corrective action if required.
