hotel room with door

Serviced apartments ruled not within TOMS

Adam Cutler, Director, VAT and Customs Duty Services
16/01/2025
hotel room with door
The Upper Tribunal has ruled that most short-term letting of serviced apartments will not fall within the Tour Operators Margin Scheme (TOMS). VAT will need to be charged on the full amount of the charge, rather than just the margin.

What was the decision?

On 14 January 2025 the Upper Tribunal released its decision in Sonder. It overturned the decision of the First-tier Tribunal, allowing HMRC’s appeal.

Sonder rents flats on leases of several years from landlords, these rents being exempt from VAT. Some of these are already furnished, others it needs to furnish and sometimes do some minor cosmetic decorating. It lets these on short-term licences to travellers, with the average stay being five days.

At the First-tier Tribunal, Sonder successfully argued that its activities fell within the TOMS allowing it to account for VAT on its gross margin. As most of the costs it incurred were exempt from VAT (the long-term letting of the flats), this was highly advantageous.

A requirement of TOMS is that goods and services received are supplied on without material alteration. The First-tier Tribunal concluded that this was the case, as there had been no significant alteration of the flats by Sonder, and the additional services such as cleaning were fairly minor.

The Upper Tribunal considered that the correct tests had been applied, but that the First-tier Tribunal had erred in confining its analysis to the physical structure. It concluded that there was a substantial difference between a lease of several years and a licence of a few days.

As the UK’s TOMS Order had implemented provisions of the EU VAT Directives pre-Brexit, the Tribunal also looked at the language used in the Principal VAT Directive. It considered that this required services received by the supplier to be ‘for the direct benefit of the traveller’ – i.e. it needed to have acquired serviced apartments in order for the onwards provision of these to be within TOMS.

Where does this leave serviced apartments operators?

For serviced apartment operators letting apartments for periods of less than a few months, this confirms that these charges are subject to VAT at 20%.

Operators whose customers are businesses able to recover VAT in full should welcome this decision as it confirms that they should account for VAT in the normal way, with the ability to recover VAT on costs incurred.

For those operators whose customers are private individuals or other parties unable to recover VAT, they will need to account for VAT on one sixth of the gross charges they make for the apartments, albeit off-set by the ability to recover VAT on their costs.

Those operators who have only accounted for VAT on their margin should consider making an error correction notification to HMRC.

The decision should not affect businesses who let apartments on long tenancies with no significant additional services, whose rents remain exempt from VAT.

Further litigation and potential changes in the law

There remains the alternative structure where an agent provides an introduction and cleaning service between the apartment owner and the guest, with VAT just due on the commission where the owner is not required to be VAT-registered. The government has launched a consultation on this model generally and litigation is ongoing with ride-hailing apps on a similar point. These structures provide a significant tax advantage over the traditional hotel sector, as well as pressure on house prices in certain areas, so this is an area the government is keen to address.

It is possible that this decision will be appealed by Sonder, but this is likely to take some time to reach the Court of Appeal if permission to appeal is allowed.

For more information contact Adam Cutler, or your usual Crowe contact.

Contact us

Adam Cutler
Adam Cutler
Director, VAT and Customs Duty Services
London

Insights

Recent tribunal decisions have cast doubt on VAT treatment of serviced apartment lets, taxi rides and other activities maybe part of a holiday.
Recent changes to the UK VAT rules applicable to sales of travel packages, known as the Tour Operator Margin Scheme (TOMS).
HMRC has clarified its policies for when VAT should be charged on cladding remediation and other fire safety works to residential buildings..
Housing providers should be preparing now to ensure they are tax-efficiently ready for development activity.
Recent tribunal decisions have cast doubt on VAT treatment of serviced apartment lets, taxi rides and other activities maybe part of a holiday.
Recent changes to the UK VAT rules applicable to sales of travel packages, known as the Tour Operator Margin Scheme (TOMS).
HMRC has clarified its policies for when VAT should be charged on cladding remediation and other fire safety works to residential buildings..
Housing providers should be preparing now to ensure they are tax-efficiently ready for development activity.