Sonder Europe loses at UTT - TOMS does not apply
posted 16th January 2025
As many of you will know by now, the UTT decision in Sonder Europe Ltd was released yesterday, much sooner than we had expected. Sonder lost its appeal, meaning that the Tribunal has ruled that, in Sonder’s case, its serviced accommodation is not within TOMS.
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Sonder’s circumstances
Sonder rented exempt residential accommodation from third party landlords in return for an annual rent for terms of 2-10 years which did not change depending on the number of days the apartments were occupied. The contract between Sonder and the landlord was typical of a normal AST style contract and restricted to residential use such as "To use the Property only as a serviced apartment for the residential occupation of one or more Occupiers." The leases were made on “internal repair and insuring” bases so Sonder was responsible for repair and maintenance, damages and utilities. Some apartments were supplied to Sonder on a furnished basis whereas others were unfurnished. When Sonder furnished the properties, it did so with its own specific style, but cosmetic changes which could easily be reversed. Sonder never made any changes which would have altered the fabric or structure of the apartment or building, such as moving a wall or door or changing windows.
Sonder offered the apartments on a self-catering basis only without any additional services for an average of 5 days. Sonder had no staff at the premises and check in was completed online with an access code then being sent to the guest. Sonder used a third part cleaning and housekeeping service pre- and post-stay, but not on a nightly basis throughout a guest's stay.
The key point discussed in both Tribunal decisions was whether material alteration occurred. If a business materially alters a service, TOMS cannot apply.
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The First Tier Tribunal (FTT) decision
At the FTT, Sonder won its case. The judge ruled that a change from letting the apartments for a term of years as accommodation, to letting them as, as Sonder did, for holiday accommodation did not amount to material alteration or further processing and in his view "the object of the alteration or processing must be the thing supplied, i.e. the apartment, not the characterisation of the supply for VAT purposes". It did not matter that Sonder had purchased a long lease and sold on small er quantities under different terms, and it did not matter that Sonder made cosmetic alterations or carried out repairs, maintenance or upkeep. The judge’s view was that in order for material alteration to occur, the accommodation must be altered physically in an irreversible way, for example interior or exterior structural changes.
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The Upper Tier Tribunal (UTT) decision
The decision in the UTT was released yesterday and the Tribunal re-made the decision, deciding in favour of HMRC. The key point of contest was that the FTT had erred in its interpretation of the matter at hand and that the “supply” was not of accommodation itself (which could only be altered physically) but was instead of a bundle of rights in that accommodation which could be altered both physically and legally as a different type of interest in land. The purchase made by Sonder was of an internal repairs and insuring lease for a term of years whereas what it sold onwards to its guests was a right to occupy a property for a number of nights.
It is not helpful that, although the decision contains a lot of text relating to the ways in which the FTT erred there is not a lot of space given to the specific factors involved in the UTT’s re-making of the decision. From reading the arguments and the eventual decision, our interpretation here is that:
- The Court accepts that what is bought in and what is supplied on do not need to be identical in nature;
- The VAT treatment of the purchase and sale, whilst relevant, is not determinative on whether TOMS applies (so the fact that the purchase is exempt and the sale is taxable does not block TOMS);
- HOWEVER the “thing” that needs to be considered with regard to materiality is not only the physical nature of the service but also the terms on which it is supplied – i.e. the bundle of rights granted between the landlord and Sonder, and Sonder and its guests.
- If the purchase and sale are materially different, then the purchase cannot be for the direct benefit of the traveller (guest).
The UTT did not discuss all factors it had taken into account when deciding whether the bundle of rights received were materially different to the onwards supply, and did not seem to provide a definition of materiality any further than the FTT already had (The FTT had originally said that “The alteration and processing must change the goods or services so that what is supplied cannot be described in the same terms as the items acquired.”).
However, it stated in the decision that: “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.”
As such, if we are being optimistic, we may read into this that the particular issue with materiality relates to the fact that the lease entered into was more than one year, that Sonder paid for utilities, taxes, repairs and maintenance and in some cases the provision of furniture. Arguably, this may mean that leases entered into of 12 months or less, where the operator does not pay for utilities, repairs, furniture etc may fall below the degree of materiality mentioned.
However, as the case does not really give us any indication of any specific tests applied for material alteration, we cannot tell from this decision alone what degree of materiality is acceptable and it is certainly not black and white.
Where does this leave us?
We have always applied caution to TOMS with serviced accommodation and stressed heavily that no-one can confirm or guarantee that TOMS applies to any provision of serviced accommodation at the moment due to the uncertainty and ongoing case law. This was not easy to demonstrate with the success of the FTT but the UTT decision here shows that, sadly, cases can turn on their head.
All businesses we have worked with will know that we have always cautioned against the risk of using TOMS and most businesses we have consulted with have set up extra arrangements to try and limit the risk of TOMS not applying. Businesses using these extra arrangements of course currently have an arguable position in the use of TOMS – the circumstances for these businesses are very different to the circumstances in Sonder. However, there is no certainty here and we do think the risk of using TOMS now in any format must increase.
What happens next?
Sonder have until 14 February to decide whether to appeal. If an appeal is made, it means that we will likely not have certainty for some time yet. It an appeal is not made, we will then need to wait to see what HMRC decide to do. They may choose to release additional guidance following the decision which will need to be reviewed and considered further before we decide anything else.
We will be running a webinar next week and will send out a mailshot with the link to this once we have set it up. Please note that this will be recorded but it is likely to be available to our clients on request only, and not made public, as we are likely to discuss points which are confidential within the industry.
We appreciate that many of you are concerned at the outcome of this decision, and I know it is not easy to hear but it is currently still a waiting game as there are several plays left for Sonder and HMRC before we can really consider how this decision may affect the industry.