Upper Tribunal Ruling on VAT for Rent-to-Rent Holiday Accommodation: Key Implications for the Industry

The Upper Tribunal (“UT”) has reversed the decision of the First-tier Tribunal (“FTT”) in the case between Sonder Europe Ltd and HMRC meaning that VAT must be accounted for on the total income received for rent-to-rent holiday accommodation rather than the margin. This will be a blow to the industry which operates on very small margins in a sector particularly sensitive to how much consumers are prepared to pay.

The dispute is whether the Tour Operators Margin Scheme (“TOMS”) should apply to supplies made by Sonder.

TOMS applies to “designated travel services” which the UK regulations define as “supplied for the benefit of a traveller without material alteration or further processing” whilst the EU directive (which applies to the period covered by the appeal) uses the term “for the direct benefit of the traveller”.

Sonder leased apartments on a long-term basis (generally 2-10 years). There was no VAT charged to Sonder on the leases as it was residential accommodation. Sonder furnished and decorated the apartments to various degrees prior to letting them out as short-term accommodation for periods of between 1 night and a month.

Sonder accounted for VAT on the margin it made saying that the supplies fell within TOMS as the accommodation was bought in and sold on without material alteration. HMRC argued that TOMS did not apply and VAT was due on the total income received.

Tribunal Findings

The FTT’s focus was on the physical alterations made to the apartments. It found that there was no material alteration as any alterations made were easily reversable. It held, therefore, that TOMS applied to the supply and Sonder could account for VAT only on the margin. 

The UT found that the FTT had erred in the test that it applied and that the correct test to be applied ought to be that 

The scheme will apply where there has not been a material alteration or further processing of the bought-in supply such that what is bought-in is not supplied for the direct benefit of the traveller”. 

It then found that in considering the facts as a whole, there was a bundle of rights supplied to Sonder that was substantially different to the bundle of rights supplied by Sonder to its guests. The court gave particular weight to the fact that Sonder entered into internal repairing and insuring leases for a term of years but that what was supplied to the guests was a licence to occupy holiday accommodation for a short duration with guests simply required to provide credit card details against which a charge could be made in the event of any damage caused. 

There was therefore a material alteration to the supply and the original supply cannot have been supplied for the direct benefit of that guest. In the words of the Court: 

Sonder was acquiring rights in land from which it could then make its own in-house supplies.