Author: Matthew Jeffery, Tax Director
Last month, a UK taxpayer won a significant VAT tax case that will have major implications for holiday let / serviced accommodation providers.
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.
Where applicable, TOMS can significantly reduce VAT or result in eligible businesses not having to register for VAT at all.
Sonder Europe Ltd, are a company that provides short-term accommodation, which they rent from the property owners. Sonder argued that they should be eligible for TOMS and therefore be subject to reduced VAT payments.
The First-Tier Tribunal (FTT) examined whether the Rent to Serviced Accommodation business model should be considered eligible for TOMS.
The points the Judge considered and answered in the case were:
- What is material alteration – Furniture? Repairs? Decorating?
- Are serviced accommodation providers eligible to be a Tour Operator?
The Tribunal Decision
The First-tier Tribunal ruled in favour of Sonder Europe Ltd. The Tribunal concluded that the company’s business model met the criteria for TOMS, allowing them to pay VAT on the profit margin rather than the full selling price.
Implications for Serviced Accommodation Providers
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 costs to landlords is a major operating cost and without TOMS allowing its deduction, it would lead to significantly higher VAT costs, based on actual sales.
Furthermore, as the VAT registration threshold of £85,000 is also based on the margin, many businesses will not have to register or pay any VAT at all.
Qualifying businesses that have not been using the TOMS scheme, many now have the grounds to retrospectively apply TOMS going back 4 years. This could generate substantial VAT repayments and long terms savings.
Note – First Tier Tribunal decisions do not 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 undoubtedly a landmark decision. It should also be noted that the Tribunal Judge and President, Greg Sinfield, is someone with a long history in the realms of VAT and the interpretation of the legislation. This gives some confidence that HMRC may not appeal or the FTT’s decision will be upheld in the Upper Tier Tribunal.
Implications for Holiday Let Owners
Whilst on the face of it, the decision will have implications for businesses that effectively ‘buy in’ the holiday accommodation by renting the property from the legal owner. However, VAT registered holiday let businesses may already be eligible to use TOMS or be able to restructure their business to benefit from the TOMS scheme.
If you would like to find out more about the TOMS scheme or whether it could benefit your holiday let business, contact Zeal Tax.
Get in touch with Team Zeal today!