TOMS for serviced accommodation under attack by HMRC

This article refers to businesses that rent in property from a third party and then rent it out as serviced accommodation, holiday lets etc.

We have advised a number of rent to serviced accommodation (R2SA) or Rent to Rent (R2R) businesses about how to account for VAT on their services.

It is a complicated area and there are 3 ways that might be used to account for VAT:

1. VAT at the standard rate 20% on supplies of serviced accommodation (NB this rate was reduced to 5% from 15 July 2020 to 30 September 2021 and then to 12.5% from 1 October 2021 until 31 March 2022)
2. If annual turnover is less than £150,000 excluding VAT a business can choose to use the flat rate scheme and pay VAT at a flat rate on their total sales. The flat rate for accommodation is usually 10.5% but was reduced to zero from 15 July 2020 to 30 September 2021 and to 5% from 1 October 2021 until 31 March 2022
3. The Tour Operators’ Margin Scheme (TOMS) is a mandatory scheme so if it applies, it must be used over and above the first two on this list. TOMS generally produces a favourable outcome because VAT is only paid on the margin between the buying in price and the selling on price.

At the end of 2021, HMRC notified us in relation to a client who had made a claim to use TOMS, that they did not consider that TOMS could apply. They consider that there has been ‘material alteration’ so that what is rented out is different to what has been rented in. They point to a difference in the lengths of the leases in compared to the supplies made by the R2R and the addition of furniture or other services. If material alteration does apply then VAT is due on the full value of the accommodation supplied.

There will be a VAT tribunal hearing on the issue probably in the next 12 months and our client has stood behind the leading case. If HMRC win the case, then they can insist that businesses making similar supplies cannot use TOMS.

Get in touch

If you have been applying TOMS or if you wish to do so we recommend that you contact our TOMS team below to discuss your circumstances.