The Upper Tribunal’s decision has significant implications for businesses that lease residential properties and rent them out as serviced apartments. It suggests that such activities may not fall within the scope of TOMS, potentially requiring these businesses to account for VAT at the standard rate on the full value of their supplies, rather than just on their profit margin. This shift could impact the VAT treatment of supplies made by similar operators in the serviced accommodation sector.
As of March 22, 2025, Sonder Europe Ltd has applied for permission to appeal the Upper Tribunal’s decision regarding the applicability of the Tour Operators’ Margin Scheme (TOMS) to its serviced apartment operations. The Upper Tribunal had previously overturned the First-tier Tribunal’s ruling, siding with HMRC in determining that Sonder’s activities did not qualify for TOMS. We are currently awaiting the court’s determination on whether the appeal will be allowed.
First-tier Tribunal (FTT): The decision was released on 5 July 2023. GOV.UK
Upper Tribunal (UT): The decision was released on 14 January 2025. GOV.UK
Discretionary Relief from Retrospective VAT Registration
If you didn’t register for VAT because you believed TOMS applied and the margin was below the VAT threshold, you would be required to do a back dated registration, however you could ask HMRC for Discretionary Relief.
Retrospective registration may not always be imposed if exceptional circumstances exist. HMRC may exercise discretion to waive backdating if it would be unreasonable to do so, or if the trader demonstrates a genuine misunderstanding or error at the time of registration
To make a compelling case to HMRC for discretionary relief from retrospective VAT registration, based on a genuine misunderstanding tied to the Sonder Europe case, you would need to write a detailed explanation highlighting the following points:
1. Establish the Context of the Misunderstanding
- Explain that the decision to not register for VAT was based on reliance on the First Tier Tribunal (FTT) decision in favour of Sonder Europe. Emphasise that this decision created a reasonable belief that the application of TOMS to similar business operations was lawful and acceptable.
- Reference the FTT’s decision, explaining how it shaped the industry practice and created precedent for similar businesses to believe TOMS was the correct VAT treatment for their supplies.Example: “The company relied on the First Tier Tribunal decision in the case of Sonder Europe, which ruled that TOMS applied to specific supplies. This ruling was widely understood in the industry as legitimate guidance for similar businesses. Consequently, the company believed that its operations fell within the scope of TOMS, and its taxable margin did not exceed the VAT threshold under this scheme.”
2. Demonstrate Good Faith
- Establish that the business acted in good faith and sought to comply with VAT rules based on the prevailing interpretation at the time.
- If applicable, include any evidence of professional advice or guidance sought (e.g., from accountants or tax advisors) that corroborated the decision to apply TOMS.Example: “The company sought professional advice from its tax advisor, who confirmed that the interpretation of TOMS, as outlined in the Sonder Europe FTT decision, was appropriate for the company’s operations. At no point did the company knowingly seek to avoid VAT registration or misapply the rules.”
3. Highlight the Impact of the Upper Tribunal Decision
- Explain that the Upper Tribunal’s (UT) decision against the application of TOMS has now significantly changed the legal interpretation of VAT treatment for similar businesses. Emphasise that this decision was unforeseen and altered the business’s understanding of its VAT obligations.Example: “The Upper Tribunal’s decision to overturn the FTT ruling in the Sonder Europe case has fundamentally changed the interpretation of VAT law regarding TOMS. This decision was unexpected and directly affected the company’s prior understanding of its VAT obligations.”
4. Request for Discretionary Relief
- Argue that it would be unreasonable to impose retrospective VAT registration under these circumstances, as the misunderstanding was genuine and based on a credible legal precedent at the time.
- Highlight that forcing retrospective registration would impose undue financial and operational burdens on the business, particularly as the business acted reasonably and in good faith.Example: “In light of the genuine misunderstanding arising from reliance on the FTT decision and the subsequent unforeseen overturning of that decision by the Upper Tribunal, we respectfully request that HMRC exercise its discretionary care and management powers to waive retrospective VAT registration. We believe it would be unreasonable to impose retrospective liabilities in this instance, given the company’s good faith reliance on prevailing legal precedent.”
5. Propose Future Compliance
- Reassure HMRC that the business is now fully committed to complying with the revised VAT treatment as clarified by the UT decision. Include a commitment to register for VAT moving forward (if required).Example: “The company is committed to ensuring full compliance with VAT obligations and will immediately register for VAT in accordance with the revised interpretation of the law. We are prepared to work with HMRC to ensure all future VAT returns are accurate and up to date.”
Should VAT Registered Business restate previous returns using Standard VAT?
The key issues include whether VAT must be restated retrospectively on the standard VAT scheme from the date of TOMS adoption or whether adjustments may be limited to future VAT returns. Additionally, if Sonder’s appeal proceeds should you keep using TOMS until thats ruled on?
Restating VAT Retrospectively
The UT ruling against the application of TOMS does not inherently require VAT to be restated retrospectively unless the UT decision explicitly mandates such action. Since HMRC policy typically supports prospective application of changes, operators may not need to restate VAT using the standard VAT scheme for prior periods unless exceptional circumstances apply
Rules explicitly stating that the Upper Tribunal mandates retrospective action in VAT compliance are not absolute but situational. Retrospective compliance is only required:
- When the Upper Tribunal explicitly mandates such action in its decision.
- When the decision constitutes a reinterpretation of the law, which inherently requires retrospective application, as per HMRC Brief 24/11.
The relevant excerpt from HMRC Brief 24/11 is as follows:
“HMRC usually announces changes in its policy or its interpretation of the law in advance. Whilst changes in policy are given a future implementation date, a change in interpretation of the law will mean that the law should always have been applied in a certain way, so the change is retrospective. On this basis, HMRC has stated that it: will not require a correction of past errors, based on the old interpretation of the law, so the new interpretation can be applied from a current or future date; will accept a correction of past errors if the business will not be better off and HMRC no worse off than if the correction was not made; and may exercise its discretion not to collect outstanding VAT where the business has been misdirected by an HMRC officer (who gave a clear ruling when in possession of all the facts).” (11)
Adjustments for Future VAT Returns
HMRC is likely to require compliance with the UT’s ruling from the date of the decision. Future VAT returns should reflect the standard VAT scheme unless the UT ruling is overturned upon appeal
Effect of Sonder’s Appeal Request
Sonder’s request to appeal the UT decision may temporarily delay the implementation of the ruling until the appeal is resolved. However, unless a stay of execution is granted, the UT ruling remains binding during the appeal process. Businesses relying on the FTT decision should comply with the UT’s ruling unless the appeal is successful. The tribunal system allows for appeals to the Court of Appeal on points of law only.
Conclusion
When the decision first came out many advisors were of the opinion that retrospective corrections were needed, in the same way that many businesses which adopted TOMS retrospectively made reclaims as TOMS saved them significant amounts of VAT. This may still be required, as HMRC may now reject the switch to TOMS, however, as it hasn’t been mandated this would give the option to change to standard going forward, pending further developments.
steve@bicknells.net
