TOMS can apply to any business, not just a travel company, that buys in and resells designated travel services in its own name. These services can include passenger transport, accommodation and car-hire and the business can be acting as principal or undisclosed agent.
In terms of reselling, under the UK rules, a ‘designated travel service’ is defined as a supply of goods or service supplied for the benefit of a traveller without material alteration or further processing. It is worth noting that the EU equivalent TOMS legislation does not include the wording on material alteration.
The taxpayer in this case leased apartments from third party landlords on long leases (3-5 years) as VAT exempt leases of residential accommodation. Some apartments were furnished but the majority were unfurnished. The taxpayer furnished the unfurnished apartments and, to a limited degree, decorated the accommodation to its brand specifications. It then sublet the apartments as short-term serviced accommodation (without tenant rights) to travellers for different periods, from a single night to a month or more. The average stay at one of these apartments in the UK was five nights.
Neither HMRC nor the taxpayer considered the furnishing and decorating as sufficient to be considered as material alteration. It was also accepted that the services of supplying serviced accommodation for short-term stays fell within the definition of travel services as defined in the TOMS legislation.
Therefore, the question asked by the Tribunal centred wholly around whether supplying the properties as serviced accommodation for short-term lets, when the taxpayer had initially taken on a 3-5 year lease as residential accommodation for the same properties, constitutes ‘material alteration’. If not, then TOMS applies but, if yes, TOMS does not apply.
If taxed under TOMS, which the taxpayer argued was the correct analysis, VAT at the standard rate would be due only on the difference between the revenue received and the costs paid to lease the properties. However, if TOMS is not applicable (HMRC’s view), the taxpayer would be liable to standard rate VAT on the full amount paid by its customers.
The Tribunal’s decision is that the change in the leasing-in arrangements compared to the leasing-out arrangements is not a material alteration and so TOMS applies. In deciding this, it referred to several well-known CJEU cases noting that, while these looked at whether or not the outbound supply was within TOMS, they had generally not considered the material alteration point as the EU law does not contain this provision.
Given the outcome in favour of the taxpayer, it will be interesting to see whether HMRC appeals the decision. If it does not, as a First-tier Tribunal decision, while informative for other similar businesses, it will not form precedence. This means HMRC could still challenge other businesses on the same point, rejecting any reclaims for overpaid VAT (where paid outside of TOMS) and/or assessing if VAT has been paid under TOMS. If, however, HMRC appeal to the Upper Tribunal, and lose, it will carry precedence, allowing other taxpayers to rely on it where the facts are sufficiently aligned. If HMRC appeal and win, it will have the reverse effect.
Given the substantial growth in the sector, it will be interesting to see how HMRC proceed. It should also be noted that, if HMRC appeal and lose, it could also raise questions on other accepted arrangements where travel businesses use the principle of ‘material alteration’ to keep VAT zero rating on some supplies, such as passenger transport.
In the meantime, any business with a similar fact pattern to this case should consider reviewing its VAT accounting, particularly if it is accounting for VAT on the full amount received from customers.
Source: SONDER EUROPE LTD v Revenue & Customs  UKFTT 610 (TC) (05 July 2023)
Approval code: NTAJ14072346
By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.
Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.