Key Guidance on the Tour Operators’ Margin Scheme (TOMS)
A binding precedent has been set by a recent Upper Tribunal (UT) ruling in the case of The Commissioners of His Majesty’s Revenue and Customs (HMRC) v Sonder Europe Ltd (Sonder), for businesses using the Tour Operators’ Margin Scheme (TOMS) to report their income for Serviced Accommodation.
The UT set aside an earlier ruling by the First-tier Tribunal (FTT), ruling that Sonder’s supplies of accommodation were outside the remit of TOMs and therefore VAT must be accounted for on the total income received – a significant change for those operating within the sector.
This may not be the end however, because Sonder has appealed against the UT to the Court of Appeal, and possibly this Case may make its way to the Supreme Court. It may therefore be some time before we have absolute certainty.
The Tour Operators’ Margin Scheme
The Tour Operators’ Margin Scheme is a special scheme for businesses that buy in and, without materially changing, resell travel, accommodation and certain other services as a principal or undisclosed agent (acting in their own name).
VAT at the standard rate is normally due on the supply of holiday accommodation. However, if TOMS applies, VAT is only due on the margin – resulting in a significantly lower amount. This makes the UT’s ruling a setback for resellers already operating with minimal profit margins.
Application of TOMS
- Transactions carried out by travel agents or tour operators (or any business providing services which are the same as or comparable to those provided by travel agents or tour operators);
- Dealing with customers in their own name;
- Using supplies of goods or services provided by other taxable persons;
- In the provision of travel facilities; and
- Where those supplies are for the direct benefit of the traveller without material alteration or further processing.
It is the last of the points that proved to be the primary issue in the UT hearing – the question of whether the supplies received by Sonder from third party landlords were being materially altered before resale.
The specifics:
- The supplies in question were supplies of accommodation in the UK to corporate and leisure travellers;
- Sonder leased self-contained apartments from third party landlords for periods between two and ten years;
- During the relevant VAT periods, the average stay in an apartment by a traveller was five nights; and
- Sonder accounted for VAT on the difference between the total amount payable by the traveller and the cost payable to the third-party landlords – the margin.
Decision
The UT set aside the decision of the FTT, allowing the appeal on the grounds that the services were not supplied by Sonder for the benefit of the traveller without material alteration and further processing.
“Sonder acquired an interest in land for a term of years… We have taken into account all those terms, and give particular weight to the fact that Sonder entered into internal repairing and insuring leases for a term of years between two and ten years. The supply which Sonder then made was a short-term licence to the traveller to occupy property it had leased as holiday accommodation…. In short the services supplied by Sonder to the traveller were its own in-house supplies, which therefore fall outside the ambit of TOMS.”
Key Points
- VAT at the standard rate is due on supplies of holiday accommodation (subject to the long lets rules). However, if TOMS applies, VAT is only due on the margin.
- The UT has decided that, in order to qualify under TOMS, supplies that have been bought in must directly benefit the end traveller and must not be materially altered.
- Businesses leasing properties on long-term let agreements for short term traveller use should assess their VAT accounting practices to ensure that they are not relying on TOMS and, where there are historical VAT liabilities that need to be taken into account, these are notified to HMRC (but with a protective appeal then lodged against the ensuing assessment).
How M+A Partners can help
Sonder has appealed to the Court of Appeal, and next steps will depend on this.
Businesses leasing properties on long-term agreements for short-term use by travellers should carefully review their VAT practices. For any guidance on this matter, please get in touch with our expert below.
