In July 2023, a significant tax case, Sonder Europe Ltd v HMRC, shed light on the VAT implications for the “Rent to Serviced Accommodation” business model in the UK. This blog post aims to provide clear instructions and guidance on how this case impacts businesses in this sector.
Whether you are already involved in this industry or considering entering it, understanding the implications of this case is crucial.
Background
The provision of holiday accommodation in the UK is subject to a 20% Value Added Tax (VAT) rate. However, the Tour Operators’ Margin Scheme (TOMS) can be used to reduce the VAT payable, as it allows businesses to pay VAT only on the margin.
The margin is calculated as the difference between the selling price and direct costs, including rent and cleaning expenses. Under TOMS, VAT is due at 1/6th of the margin for accommodations within the UK.
The Case
In the Sonder Europe Ltd v HMRC case, the First-tier Tribunal examined whether the Rent to Serviced Accommodation business model should be considered eligible for TOMS.
Points considered and answered in the case
- What is material alteration – Furniture? Repairs? Decorating?
- Is R2SA eligible to be a Tour Operator
As is typical in this sector the agreements with landlords are often 6 months to 3 years.
Sonder Europe Ltd, a company providing short-term accommodation, argued that they should be eligible for TOMS and therefore be subject to reduced VAT payments.
The Tribunal Decision
Sonder Europe Ltd v HMRC [2023] UKFTT 610 (TC) (5 July 2023)
The First-tier Tribunal ruled in favour of Sonder Europe Ltd., stating that their accommodation services fall under the TOMS scheme. The Tribunal concluded that the company’s business model met the criteria for TOMS, allowing them to pay VAT based on the margin rather than the full 20% VAT rate.
Note – First Tier Tribunal decisions don’t set a precedent, the case was based on EU Laws applicable at the time and HMRC may Appeal or bring further cases, but this is a land mark decision and it should also be noted that the Tribunal Judge and President, Greg Sinfield, is someone with a long history in the realms of VAT Liability questions and the interpretation of the legislation.
Where TOMS applies it must be applied and that means that many operators may now have grounds to apply TOMS VAT going back 4 years and stand behind the Sonder case.
Implications for R2SA VAT
The Sonder Europe Ltd v HMRC case has significant implications for businesses operating in the Rent to Serviced Accommodation sector. Following the Tribunal’s decision, such businesses can potentially benefit from substantial VAT savings by utilising TOMS. This is because Rent to Landlords is a major cost and without TOMS allowing its deduction would lead to high VAT costs which would be based on Sales.
Step-by-Step Guidance
To successfully apply the implications of the Sonder Europe Ltd v HMRC case to your Rent to Serviced Accommodation business model, follow these steps:
- Understand your business model:
Familiarise yourself with the specific details of your Rent to Serviced Accommodation business model. Ensure it aligns with the characteristics that allowed Sonder Europe Ltd to be eligible for TOMS. - Analyse direct costs:
Determine the direct costs associated with your accommodation services, including rent, cleaning, maintenance, and other relevant expenses. These costs are crucial for calculating the VAT margin. - Calculate the VAT margin:
Subtract the total direct costs from your selling price to calculate the VAT margin. This margin will form the basis for VAT payments under TOMS. - Apply the TOMS VAT rate:
Multiply the VAT margin by 1/6th (0.1667) to determine the VAT due on your accommodation services. This result represents the reduced VAT payment you are eligible for under TOMS. - Maintain accurate records:
Keep detailed records of your sales (tax point will be departure date), direct costs, and VAT payments. Transparent and accurate documentation is crucial for compliance and potential future audits.
Conclusion
The Sonder Europe Ltd v HMRC case has provided a positive outcome for the Rent to Serviced Accommodation business model in relation to VAT payments. Utilising TOMS based on the Tribunal’s decision can lead to significant VAT savings. By understanding the implications of this case and following the step-by-step guidance provided, you can successfully adapt your business model to benefit from reduced VAT payments.
Read our other blogs on TOMS
Is TOMS an option for Serviced Accommodation VAT? – Steve J Bicknell Tel 01202 025252
If TOMS applies is the VAT threshold based on Sales or Margin? – Steve J Bicknell Tel 01202 025252
