The long-awaited decision in the case of Sonder Properties Limited has now been released with the First Tier Tribunal finding in favour of the taxpayer. The case is concerned with whether or not rent-to-rent serviced accommodation providers can use the Tour Operators Margin Scheme (“TOMS”) to calculate their  their VAT liability.  Where a business is required to use TOMS (if it applies it is compulsory to use it) , then the requirement to register for VAT is measured using the gross margin rather than the total sales figure; also, under TOMS, output VAT is calculated on that margin, rather than on total sales made.

In summary the Tribunal found:

• That Sonder was a tour operator because it provided services that were identical or at least comparable to those of a tour operator.
• 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.
• 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).
• That the apartments themselves were not materially altered despite their tax status changing from exempt land for 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.

It is likely that HMRC will either Appeal this decision to the Upper Tribunal and beyond or will change the UK legislation to prevent TOMS being used in rent-to-rent situations. We should know their intentions shortly. More information about the case can be found HERE.

However, if you have registered for VAT under the “normal rules” and therefore registered too early and have then accounted for VAT under those rules rather than under TOMS, then it may be possible for you to make a claim to HMRC for a repayment of VAT overpaid. Claims are restricted to VAT overpaid in the last 4 years and will be net of any VAT you have claimed or any “direct costs” of providing the accommodation such as on rent, cleaning, laundry, linen etc. Claims should be made as soon as possible and then “stood behind “ the Sonder Properties Limited case if HMRC take their case to the Upper Tribunal and Ormerod Rutter would be happy to make a claim on your behalf.

For more information, don’t hesitate to contact us on 01905 700949, or drop us a line on hello@propertytaxpeople.co.uk.