The Commissioners for HMRC v Sonder Europe Limited

For the Tour Operators’ Margin Scheme, a bought-in supply must be used to provide travel facilities and supplied for the direct benefit of travellers. The domestic requirement that it be supplied without material alteration or further processing must be construed consistently with that requirement.

The relevant comparison is between the full bundle of rights and interests acquired and the rights supplied to the traveller. It is not confined to physical changes to property or to whether the supplies are described in identical terms. A trader acquiring long-term interests in land and granting short-term licences to travellers may be making its own in-house supplies outside the scheme.

HMRC appealed against the First-tier Tribunal’s decision that Sonder’s supplies of short-term accommodation fell within the Tour Operators’ Margin Scheme. Sonder leased self-contained apartments from landlords for terms of two to ten years, furnished some apartments, and granted travellers short-term licences to occupy them. It accounted for VAT on its margin.

The FTT held that the apartments were supplied for travellers’ benefit without material alteration or further processing. The central issue before the Upper Tribunal was whether that conclusion applied the correct construction of article 3(1)(b) of the Value Added Tax (Tour Operators) Order 1987, read consistently with Articles 306 to 310 of the Council Directive 2006/112/EC.

1. Appeal allowed and FTT decision set aside. The Upper Tribunal remade the decision and dismissed Sonder’s appeal against the VAT assessments.
2. The EU special scheme requires the bought-in supplies to be supplied for the direct benefit of travellers. That requirement arises from the structure of Articles 306 to 310 of the Council Directive 2006/112/EC, including the treatment of direct-benefit costs in the margin calculation and the associated input-tax restriction (paras [77]-[80]).
3. Article 3(1)(b) of the Value Added Tax (Tour Operators) Order 1987 must be construed conformably with that requirement. The phrase “without material alteration or further processing” captures whether the bought-in supply remains one supplied for the direct benefit of the traveller (paras [81]-[88]).
4. The FTT erred by treating the apartment and physical alterations to it as the relevant subject matter. The proper comparison is between the complete rights and interests acquired from the landlord and those supplied to the traveller. Physical changes remain relevant, but are not determinative (paras [92]-[100]).
5. On the facts, Sonder acquired long-term interests in land under internal repairing and insuring leases and supplied short-term licences to occupy furnished holiday accommodation. These were materially different bundles of rights. The supplies to travellers were Sonder’s own in-house supplies and fell outside TOMS. The conclusion was even clearer for apartments acquired unfurnished and then furnished by Sonder (paras [106]-[117]).
6. Grounds 2 and 3 did not arise. The Tribunal nevertheless indicated that, had the correct test been applied, it would have been slow to interfere with the FTT’s evaluative judgment and would not have treated the absence of express reference to utilities, council tax and upkeep as an error of law (paras [101]-[105]).

• Upper Tribunal (Tax and Chancery Chamber): Allowed HMRC’s appeal, set aside the FTT decision, and remade the decision by dismissing Sonder’s appeal against the assessments.
• First-tier Tribunal (Tax Chamber): Allowed Sonder’s appeal and held that its accommodation supplies fell within TOMS. Decision released on 5 July 2023.