MHA | First Tier Tax Tribunal ruling on TOMS VAT could save…

First Tier Tax Tribunal ruling on TOMS VAT could save rent-to-rent business model

Sue Rathmell · July 19th 2023 · read

Hotel pillow

Sonder Europe Ltd has won its case against HMRC at the First Tier VAT Tribunal. The decision was released on 14 July 2023 and can be found here The Finance & Tax Tribunal (

Update 6 September 2023 - HMRC has appealed this decision to the Upper Tier VAT Tribunal. It is likely to be a year before we know the outcome. In the meantime, businesses can continue to use TOMS but if HMRC win, VAT returns would need to be reworked using normal VAT rules.

What is the case about?

The provision of holiday accommodation is standard-rated, 20% for VAT. If TOMS can be used then the amount of VAT payable is significantly reduced because under TOMS you pay VAT only on the margin, which is the difference between the selling price and the direct costs of the accommodation, including rent, cleaning etc. Under TOMS VAT is due at 1/6th of the margin where the accommodation is in the UK.

What did the Tribunal decide?

The Tribunal has ruled that where you rent in or lease in accommodation for any period of time (eg a season or a couple of years) from a third party and then rent out that accommodation as holiday accommodation, TOMS applies. HMRC argued a number of points to the Tribunal to try and persuade them that TOMS cannot apply in these circumstances and the Tribunal rejected all HMRC’s points. 

The Tribunal:

  • Ruled that Sonder was a tour operator because it provided services that were identical or at least comparable to those of a tour operator.
  • Agreed that accommodation supplied on its own can fall within TOMS, i.e. there is no need to supply further travel services with accommodation for TOMS to apply.
  • Agreed that the addition of furniture, repairing damage or decorating did not constitute material alteration. HMRC said that material alteration had occurred so that what was rented in was not the same as what was rented out. If there had been material alteration then TOMS could not apply. However, note that Sonder spent a relatively small amount on maintenance and repairs - £20,000 in comparison to £1.5m paid in rents to landlords.
  • Decided that the apartments themselves were not materially altered despite their tax status changing from exempt land for a residential occupation to holiday accommodation. The Tribunal said that material alteration ‘must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services.’ Although the Tribunal did not appear to consider the addition of gas, electricity, broadband, Sky etc, we think that the Tribunal’s comments here and also regarding furniture would apply to these utilities and services. The Tribunal said that changes that can be reversed such as painting a wall or removing furniture, are not material alteration or processing.

What happens next?

The good news is that there is no decision to prevent you from applying TOMS in an R2R scenario if your situation is on all fours with Sonder’s. If you are not using TOMS then please contact me. HMRC have 56 days to decide whether to appeal the decision to the Upper Tier Tribunal. If they do, then we await the next round of the battle!

You can only go back 4 years to make a claim for overdeclared VAT, so if you are not already using TOMS, you should consider whether you need to make a claim applying TOMS and then potentially stand behind Sonder’s appeal in the courts to protect your position. We can help you with this.

HMRC may decide not to appeal. First Tier Tribunal decisions are not determinative so HMRC may still question the use of TOMS for R2R and they could decide to take another case in the future. Alternatively, they may change the UK VAT law to exclude these types of supplies from being within TOMS. 

If you are affected by this tribunal ruling, please contact your nearest MHA representative.

Contact us
Share this article
Related tags