Upper Tribunal overturns FTT decision on Sonder Europe Ltd and TOMS

In a recent decision, the Upper Tribunal (“UT”) has overturned the First Tier Tribunal’s (“FTT”) ruling on Sonder Europe Ltd (“Sonder”), finding that the FTT had misinterpreted the Tour Operators Margin Scheme (TOMS) Order (SI 1987/1806).

What is TOMS?

TOMS is a special VAT scheme designed for businesses that buy in and resell travel-related services as a package. This includes businesses offering coach tours, theatre trips, and hotel accommodation. Instead of accounting for VAT on each individual service, businesses using TOMS pay VAT only on their profit margin.

Sonder had been leasing residential apartments in the UK from third-party landlords on a long-term basis and then renting them out on a short-term basis to travellers. The FTT initially ruled that this activity fell within TOMS, meaning VAT would only be due on the profit margin.

Why Did the UT Overturn the decision?

The Upper Tribunal disagreed with the FTT and found that Sonder’s activities did not qualify for TOMS. The key reasons were:

Changes to the accommodation:

Sonder’s leases with landlords gave it rights to occupy the properties, but these rights were materially altered before being provided to travellers. This means Sonder’s role was more than just reselling the same accommodation—it was transforming it (e.g., furnishing, managing, or altering its use) before letting it out.

Services not directly for the traveller’s benefit:

The UT also noted that the landlords’ services to Sonder were not provided directly for the benefit of Sonder’s customers. This interpretation is based on EU law, which states that supplies must be directly for the benefit of the traveller to fall within TOMS. However, the UK’s TOMS order does not use this exact wording, leading to some uncertainty in interpretation.

So what does this mean for businesses?

This ruling could have significant VAT implications for businesses that buy in and resell short-term accommodation, such as:

Companies leasing residential properties and renting them out as serviced apartments.
Businesses providing short-term holiday lets via online platforms.
Travel operators bundling accommodation with other services.

While it is unclear whether Sonder will appeal the decision, businesses engaged in similar activities should review their VAT position and consider whether they are correctly applying TOMS or if their services should be taxed differently.

If you need assistance or have any queries, please get in touch with a member of the team using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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