VAT treatment in the serviced accommodation sector remains a complex issue. Recent Tribunal hearings involving Sonder Europe Ltd have highlighted the challenges businesses in this sector face when it comes to VAT classification and structuring their business in a way that ensures competitiveness in an increasingly saturated market.
On the downside, misclassification of the services being provided from a VAT perspective can lead to significant financial consequences, including unexpected VAT liabilities, penalties, and legal disputes.
VAT on short-term accommodation vs. residential Lettings
A key issue in the VAT treatment of serviced accommodation is determining whether your business falls under VAT-exempt residential lettings or VAT standard-rated short-term accommodation. The difference between these can significantly affect your VAT liability, and even slight variations in services offered, such as housekeeping or concierge, can make a crucial difference:
- Short-term accommodation (serviced accommodation) (VAT standard-rated): If you provide short-term lets, such as Airbnb-style rentals, or provide accommodation with other types of services, these are typically treated as hotel-like services and are subject to VAT at the standard 20% rate. This applies when additional services such as housekeeping or concierge services are provided. Longer term stays in accommodation that is similar to holiday accommodation may sometimes qualify for a reduced rate of VAT.
- Residential Lettings (VAT Exempt): Longer-term lettings, such as those under assured tenancy agreements (typically lasting over six month), are generally VAT-exempt. However, businesses offering short-term stays sometimes fall into a grey area between these categories, leading to confusion and potential misclassification.
Supply of short-term accommodation and The Sonder Europe Ltd Case
The Sonder Europe Ltd case is attracting significant attention because it highlights the complexities of VAT treatment for businesses with innovative models. Sonder operates short-term lets in Europe and the UK, subletting furnished properties to guests for short stays. Their model includes providing hotel-like services such as cleaning and concierge support, making them comparable to serviced apartments.
The First-Tier Tribunal examined whether Sonder’s Rent to Serviced Accommodation (R2SA) model could qualify for the Tour Operator’s Margin Scheme (TOMS), which allows businesses to pay VAT only on their profit margin rather than on the total amount charged to customers. The court assessed vital aspects such as whether material alterations like furnishings, repairs, and decorating affected Sonder’s eligibility for the scheme and whether the R2SA business model met the criteria required for classification as a tour operator under TOMS.
The Tribunal initially ruled in Sonder’s favour, recognising their eligibility for the Tour Operators Margin Scheme (TOMS), which provided them with a significant tax-saving advantage compared to the standard VAT treatment. However, HMRC appealed the decision, and the Upper Tier Tribunal has since overturned the First Tier Tribunal’s ruling, determining that TOMS VAT did not apply in Sonder’s case, primarily due to the alteration of the onward supply to the traveller.
We understand that Sonder intends to take its case to the Court of Appeal. If you believe your business may be impacted by the outcome of this case, we encourage you to discuss this matter with us further. It may be beneficial to consider submitting a protective claim to HMRC or exploring potential restructuring options to take advantage of the reduced VAT obligations that the TOMS VAT scheme could offer.
How we can help you stay VAT compliant
This evolving environment makes it crucial for serviced accommodation providers to seek regular expert VAT advice. Our in-house VAT department actively supports many clients in the industry, helping them navigate these complex rules and identify opportunities for savings and reclassification. By taking a proactive approach to reviewing your VAT position and being at the forefront of industry developments, we ensure your business remains compliant amidst future shifts in the VAT landscape. To learn more about how we can support you, please get in touch today.
Email: [email protected]
Phone: 01926 422292
