What is the Tour Operators' Margin Scheme and why would a serviced-accommodation operator use it?

TOMS, in section 53 VATA 1994 and Notice 709/5, is a special VAT scheme for businesses that buy in travel-type services from third parties and resell them to travellers without material alteration. VAT is calculated on the operator's margin (sale price less cost of bought-in services) rather than on the full sale price. For a serviced-accommodation operator with thin margins on bought-in room nights, TOMS can produce dramatically less VAT than the standard scheme.

Did TOMS ever apply to a serviced-accommodation business buying in long leases and on-letting short-stay?

Sonder Europe argued that it did. The First-tier Tribunal in 2023 agreed: the long leases were bought-in supplies that Sonder on-sold to travellers, and Sonder did not materially alter what was bought. The Upper Tribunal reversed that in March 2024, holding that Sonder had materially altered the supply by furnishing, cleaning, branding, providing reception services, and converting long-term residential interests into short-stay accommodation. After Sonder, the door is much narrower for this business model.

What did the Upper Tribunal actually decide in Sonder?

The Upper Tribunal held that for TOMS to apply, the supply made to the traveller must be the same supply as the one bought in. Where the operator buys long-term residential leases (typically 1 to 25 years) and sells short-stay nights with cleaning, linen changes, branding, and reception services, the operator has not on-sold the bought-in service in substantially the same form. The operator has used the bought-in service as an input into a different (taxable) supply, which falls outside TOMS.

Does TOMS still apply to any serviced-accommodation operating model?

Yes, but on a narrower footprint. An operator that genuinely buys in and resells short-stay room nights (rather than long-term leases) without material alteration can still operate under TOMS. An operator that contracts with hotels or aparthotels for short-stay block-booked rooms and on-sells them to corporate clients without rebranding or adding services is closer to the historical TOMS pattern and remains within scope.

What is the VAT registration threshold impact of losing TOMS?

Under TOMS, the relevant turnover for the £90,000 VAT registration threshold is the operator's margin (sale price less cost of bought-in services). Outside TOMS, the relevant turnover is the full gross sales. For an operator with £1.2m of gross short-stay revenue and £900,000 of bought-in long-lease cost, TOMS treats £300,000 as the relevant turnover figure and standard treatment treats £1.2m. The threshold-crossing implication is immediate.

What is the cash-flow impact?

Under TOMS, VAT is paid on the margin only (£300,000 × 20% = £60,000 on the worked example above). Under standard VAT, the operator charges VAT at 20% on the £1.2m to the traveller (£240,000) and is supposed to recover input VAT on costs. Costs that are not standard-rated taxable supplies to the operator (residential leases are typically exempt) produce no recoverable input VAT, so the operator bears the full £240,000 of output VAT as a cost or passes it through in prices. Some operators have responded by restructuring as direct-let businesses or by passing the VAT through in raised nightly rates.

How should a serviced-accommodation operator respond to the Sonder decision?

First, identify whether the business is genuinely TOMS-eligible on the new, narrower test (buying in short-stay room nights from third parties without material alteration) or whether it falls outside (long-lease-and-short-let model). Second, where TOMS no longer applies, model the standard-VAT position including VAT registration timing, input-VAT recovery on landlord rent (typically nil where the landlord has not opted to tax), and pricing options. Third, document the analysis: HMRC enquiry exposure on historic TOMS returns has increased materially after Sonder.

What VAT rate applies to short-stay serviced accommodation?

The supply of short-stay accommodation (under 28 days) by a person carrying on a business is taxable at the standard rate of 20% if the business is VAT-registered. The supply of long-stay accommodation (28+ continuous days) is partly reduced to a lower effective rate under the long-stay reduction (after 28 days, output VAT is calculated on a deemed lower base). The mechanics of the long-stay reduction are in Notice 709/3.

Does the operator's contract with the landlord matter?

Critically. A management agreement under which the operator takes a percentage of bookings and the landlord remains the supplier of the accommodation produces a different VAT profile (the operator is paid an agency-style fee) from a lease under which the operator pays rent to the landlord and on-sells the rooms to travellers (the Sonder pattern). The contractual form is one of the principal factors in determining where the supply chain falls.

Can an operator opt back into TOMS for past periods if it operated under the standard scheme?

TOMS is mandatory rather than elective for supplies that fall within its scope, so operators that should have used TOMS but did not are technically eligible to amend returns. After Sonder, however, most operators will find their previous TOMS treatment has been narrowed, not broadened. The amendment direction is usually away from TOMS, not toward it.

Is there a VAT grouping option that helps?

VAT grouping can help where the landlord and the operator are connected (eg same group of companies). Intra-group supplies are outside VAT, so the operator's payment to the landlord SPV for the lease becomes a non-supply. The operator then makes a single external supply to travellers. The trade-off is that the group must be eligible (control test) and that joint-and-several liability for VAT applies across the group.

Does the FHL abolition (April 2025) interact with this?

The FHL abolition is a direct-tax change (loss of CGT/IT reliefs for former FHL properties) and is separate from the VAT position. A property let on a serviced-accommodation basis (short-stay with services) is a standard-rated VAT supply regardless of FHL status. Operators that were treating FHL income as outside VAT on the historical FHL-equals-residential-letting framing should review the position; short-stay-with-services has always been a taxable supply at standard rate.

Property Types & Specialist Tax

TOMS VAT for Serviced Accommodation: What Sonder Changed, and What Still Works

22 May 2026 · Property Tax Partners Editorial Team · 7 min read

TOMS limits VAT to the operator's margin rather than full turnover, which made it attractive for serviced-accommodation operators buying in long leases and on-letting short-stay. The Sonder Europe Upper Tribunal decision in March 2024 narrowed the door sharply. Mechanics, the case, and the operating models that still qualify.

Modern London waterfront apartment buildings reflected in the river, representing serviced accommodation stock operated by UK short-let providers

The Tour Operators' Margin Scheme has been a structural pillar of how serviced-accommodation operators in the UK manage VAT for at least a decade. By taxing the operator's margin rather than the full sale price, TOMS could turn a £1.2m gross-revenue business into a £300,000 VATable turnover for registration and output-tax purposes. For operators with thin margins, the difference between paying 20% VAT on the margin and 20% VAT on the gross was the difference between a viable business and a loss-making one.

In March 2024, the Upper Tribunal in Sonder Europe Ltd v HMRC reversed the First-tier Tribunal and held that the most common operating model (taking long leases from residential landlords, furnishing and branding the units, and on-selling short-stay nights to travellers) does not qualify for TOMS. The decision did not abolish TOMS for serviced accommodation, but it narrowed it sharply: only operators that genuinely buy in and on-sell short-stay room nights without material alteration remain within the scheme.

This page covers what TOMS is, the operating-model test the Upper Tribunal applied, the financial impact of falling outside, and the routes that still work post-Sonder.

What TOMS Is and How It Works

TOMS sits in section 53 of the Value Added Tax Act 1994 and is detailed in HMRC's VAT Notice 709/5. It is a special scheme for businesses that buy in travel-type services from third parties (transport, accommodation, sightseeing, ancillary services) and resell them to travellers without material alteration.

Under TOMS:

The operator's relevant turnover is the margin (sale price minus the cost of bought-in services), not the gross sales.
Output VAT is calculated on the margin at the standard rate.
Input VAT on the bought-in services is not recoverable (it is reflected in the margin calculation).
The £90,000 VAT registration threshold is tested against the margin figure, not against gross sales.

The scheme was originally designed for tour operators (hence the name) but its scope extends to any business that meets the bought-in-and-resold-without-material-alteration test, including coach operators, conference organisers, and (historically) certain serviced-accommodation models.

The Conditions for TOMS Eligibility

The Sonder decision tightened the focus on three of the standard TOMS conditions:

The supply must be of designated travel services: accommodation, transport, restaurant meals, or sightseeing/excursion services.
The supply must be made for the benefit of travellers. Travellers includes business travellers and corporate clients booking for their staff.
The supplies must be bought in from third parties, not self-provided. And the operator must not have materially altered or further processed them before resale.

The third condition is where Sonder fell over. The Upper Tribunal's analysis was that Sonder had not just on-sold a bought-in service; it had used the bought-in service as an input into a different supply.

The Sonder Europe Case in Detail

The Business Model

Sonder Europe operated a UK serviced-accommodation business in the period from 2017 to 2020. The business model:

Sonder took long-term leases (typically 5 to 10 years) on flats from residential landlords.
Sonder furnished, decorated, and branded each unit to a consistent Sonder standard.
Sonder provided cleaning, linen changes, Wi-Fi, and reception/guest-service support.
Sonder marketed the units on its own website and on third-party platforms.
Travellers booked short-stay nights (typically two to fourteen nights) at nightly rates set by Sonder.

Sonder claimed TOMS for the supplies to travellers on the basis that the long lease from the landlord was a bought-in accommodation service that Sonder on-sold without material alteration.

The First-tier Tribunal Decision (2023)

The FTT agreed with Sonder. The Tribunal held that the long lease was a supply of accommodation, Sonder had bought it in, and the on-sale to travellers was the same accommodation service. The furnishings, cleaning, and branding were ancillary and did not change the essential nature of the supply.

The Upper Tribunal Reversal (March 2024)

HMRC appealed. The Upper Tribunal reversed the FTT and held in HMRC's favour on three grounds:

A long-term residential lease and a short-stay furnished serviced accommodation night are not the same supply for VAT purposes. They have different durations, different exempt-vs-taxable status (the long lease is typically exempt from VAT; the short-stay supply is taxable), and different commercial substance.
The operator's activities of furnishing, branding, cleaning, providing reception, and converting a long-term residential interest into a short-stay product constitute material alteration or further processing. They are not merely ancillary to an on-sale of the original supply.
The supplier did not buy in something it then sold on. It bought in an input and used it to create something different.

The Upper Tribunal noted that an operator that buys short-stay room nights from a hotel and on-sells them to a corporate client without alteration would still qualify for TOMS. The narrowing was specific to the long-lease-into-short-let pattern.

The Financial Impact of Falling Outside TOMS

Consider a serviced-accommodation operator with the following profile:

Gross short-stay revenue: £1.2m per year.
Rent paid to landlords on long leases: £900,000 per year (typically exempt from VAT because the landlords have not opted to tax residential property).
Operating costs (cleaning, utilities, marketing, staff): £200,000 per year.
Operator's margin: £100,000.

Under TOMS, the relevant turnover for registration is the margin (£300,000 on the bought-in services calculation, computed in line with TOMS-specific rules). Output VAT is around £50,000 a year on the margin. Input VAT on operating costs is not separately recoverable; it is reflected in the margin.

Outside TOMS:

Gross sales of £1.2m are within the £90,000 registration threshold trigger from day one.
Output VAT on £1.2m × 20% = £240,000.
Input VAT recovery: the landlord rent (£900,000) is exempt, so no input VAT to recover. The operating costs (£200,000) include some VAT-bearing supplies (cleaning, utilities, marketing) on which input VAT can be recovered, typically £20,000 to £30,000.
Net VAT cost: roughly £210,000 a year.

The £160,000 a year swing (£210,000 standard minus £50,000 TOMS) is enough to make the difference between a sustainable operating margin and a loss-making business. Operators have responded in three principal ways: passing the VAT through in nightly rates (the easiest in strong-demand locations), renegotiating landlord rents downward (slow and lease-dependent), or restructuring to bring properties into the operator's ownership so the supply chain changes.

Operating Models That Still Qualify After Sonder

Buy-In and Resell of Short-Stay Room Nights

The historically clean TOMS case. An operator contracts with hotels, aparthotels, or short-stay operators for blocks of room nights at wholesale rates, and on-sells them to corporate clients or to consumers without altering the substantive nature of the accommodation. Cleaning, linen, and reception are provided by the underlying hotel; the operator's role is procurement and distribution. TOMS continues to apply on the operator's margin.

Inbound Tour Operator (Traditional TOMS Case)

An operator packaging UK accommodation with transport, sightseeing, and meals for overseas tour groups. Each component is bought in from third-party providers and on-sold to the tour group without material alteration. The package-pricing model fits TOMS naturally.

Corporate Short-Stay Aggregation

An operator that aggregates short-stay accommodation needs for corporate clients (typically multinationals relocating staff) by buying short-stay nights from a network of serviced-accommodation operators and on-selling them to the corporate. The operator does not own, lease, furnish, or operate the underlying accommodation; the supply on-sold is the same as the supply bought in. TOMS continues to apply.

Models That Now Fall Outside

Long-Lease-and-Short-Let (Sonder Pattern)

The Sonder model: taking long leases from landlords, furnishing and branding, and on-selling short-stay nights. After the Upper Tribunal decision, this falls outside TOMS. The operator makes a standard-rated supply at full sale price, registers and accounts for VAT on the gross.

Direct-Owned Serviced Accommodation

An operator that owns or holds long-leases on the underlying property and lets it directly to travellers makes its own supply of accommodation, not a bought-in-and-resold supply. TOMS has never applied to this model.

Management-Agreement Models (Variable)

Where the operator manages property for a landlord under a management agreement (commission-based, with the landlord remaining the principal supplier of accommodation), the VAT analysis depends on whether the operator is acting as agent or principal. Agent-based management agreements typically produce a commission supply by the operator, which is standard-rated but on the commission amount only.

What Operators Should Do Now

For an existing operator that has been applying TOMS, the post-Sonder response sequence is:

Review the operating model against the Upper Tribunal's reasoning. The dispositive question is whether the supply on-sold is the same supply as the one bought in. A long lease into short-stay is the paradigmatic now-outside case.
Identify the four-year window for HMRC enquiry on historical TOMS returns. Voluntary disclosure of the TOMS-no-longer-applies position carries lower inaccuracy penalties than waiting for an HMRC challenge.
Model the standard-VAT position prospectively, including pricing options and the impact on landlord-rent negotiations.
Consider structural alternatives: VAT grouping with the landlord SPV (where feasible), direct ownership, or genuinely buy-in-and-resell remodelling.
Document the analysis: HMRC compliance activity on serviced-accommodation VAT has increased materially since the Upper Tribunal decision, and contemporaneous analysis is the principal defence on inaccuracy-penalty exposure.

For a new entrant designing a serviced-accommodation business in 2026, the VAT structuring choice is much more constrained than it was pre-Sonder. The long-lease-and-short-let model now carries a near-certain standard-VAT outcome, and the financial model has to absorb that from day one rather than relying on TOMS to keep the VAT burden manageable.

How VAT Sits Alongside the Wider Property-Tax Position

Serviced accommodation operators have a complex direct-tax position as well. The April 2025 abolition of the Furnished Holiday Letting regime removed historical income-tax and CGT advantages that some operators had relied on. The VAT position covered on this page sits alongside the income-tax position covered in income tax rates for landlords in 2026/27 and the corporation-tax position covered in corporation tax rates for property companies in 2026/27 for operators trading through a Ltd Co structure.

VAT is rarely the dominant tax cost for an owner-occupier landlord, but for serviced-accommodation operators it is structurally the largest tax line in the P&L. Getting it wrong after Sonder is materially more expensive than getting it right.

Frequently asked questions

What is the Tour Operators' Margin Scheme and why would a serviced-accommodation operator use it?: TOMS, in section 53 VATA 1994 and Notice 709/5, is a special VAT scheme for businesses that buy in travel-type services from third parties and resell them to travellers without material alteration. VAT is calculated on the operator's margin (sale price less cost of bought-in services) rather than on the full sale price. For a serviced-accommodation operator with thin margins on bought-in room nights, TOMS can produce dramatically less VAT than the standard scheme.
Did TOMS ever apply to a serviced-accommodation business buying in long leases and on-letting short-stay?: Sonder Europe argued that it did. The First-tier Tribunal in 2023 agreed: the long leases were bought-in supplies that Sonder on-sold to travellers, and Sonder did not materially alter what was bought. The Upper Tribunal reversed that in March 2024, holding that Sonder had materially altered the supply by furnishing, cleaning, branding, providing reception services, and converting long-term residential interests into short-stay accommodation. After Sonder, the door is much narrower for this business model.
What did the Upper Tribunal actually decide in Sonder?: The Upper Tribunal held that for TOMS to apply, the supply made to the traveller must be the same supply as the one bought in. Where the operator buys long-term residential leases (typically 1 to 25 years) and sells short-stay nights with cleaning, linen changes, branding, and reception services, the operator has not on-sold the bought-in service in substantially the same form. The operator has used the bought-in service as an input into a different (taxable) supply, which falls outside TOMS.
Does TOMS still apply to any serviced-accommodation operating model?: Yes, but on a narrower footprint. An operator that genuinely buys in and resells short-stay room nights (rather than long-term leases) without material alteration can still operate under TOMS. An operator that contracts with hotels or aparthotels for short-stay block-booked rooms and on-sells them to corporate clients without rebranding or adding services is closer to the historical TOMS pattern and remains within scope.
Does TOMS apply to direct-let serviced accommodation where the operator owns the property?: No. TOMS only applies to bought-in services. An operator that owns or holds long-leases on the underlying property and lets it directly to travellers makes its own supply of accommodation, taxable at standard rate where the supply is short-stay (under 28 days), subject to the normal VAT registration threshold rules.
What is the VAT registration threshold impact of losing TOMS?: Under TOMS, the relevant turnover for the £90,000 VAT registration threshold is the operator's margin (sale price less cost of bought-in services). Outside TOMS, the relevant turnover is the full gross sales. For an operator with £1.2m of gross short-stay revenue and £900,000 of bought-in long-lease cost, TOMS treats £300,000 as the relevant turnover figure and standard treatment treats £1.2m. The threshold-crossing implication is immediate.
What is the cash-flow impact?: Under TOMS, VAT is paid on the margin only (£300,000 × 20% = £60,000 on the worked example above). Under standard VAT, the operator charges VAT at 20% on the £1.2m to the traveller (£240,000) and is supposed to recover input VAT on costs. Costs that are not standard-rated taxable supplies to the operator (residential leases are typically exempt) produce no recoverable input VAT, so the operator bears the full £240,000 of output VAT as a cost or passes it through in prices. Some operators have responded by restructuring as direct-let businesses or by passing the VAT through in raised nightly rates.
How should a serviced-accommodation operator respond to the Sonder decision?: First, identify whether the business is genuinely TOMS-eligible on the new, narrower test (buying in short-stay room nights from third parties without material alteration) or whether it falls outside (long-lease-and-short-let model). Second, where TOMS no longer applies, model the standard-VAT position including VAT registration timing, input-VAT recovery on landlord rent (typically nil where the landlord has not opted to tax), and pricing options. Third, document the analysis: HMRC enquiry exposure on historic TOMS returns has increased materially after Sonder.
What VAT rate applies to short-stay serviced accommodation?: The supply of short-stay accommodation (under 28 days) by a person carrying on a business is taxable at the standard rate of 20% if the business is VAT-registered. The supply of long-stay accommodation (28+ continuous days) is partly reduced to a lower effective rate under the long-stay reduction (after 28 days, output VAT is calculated on a deemed lower base). The mechanics of the long-stay reduction are in Notice 709/3.
Does the operator's contract with the landlord matter?: Critically. A management agreement under which the operator takes a percentage of bookings and the landlord remains the supplier of the accommodation produces a different VAT profile (the operator is paid an agency-style fee) from a lease under which the operator pays rent to the landlord and on-sells the rooms to travellers (the Sonder pattern). The contractual form is one of the principal factors in determining where the supply chain falls.
Can an operator opt back into TOMS for past periods if it operated under the standard scheme?: TOMS is mandatory rather than elective for supplies that fall within its scope, so operators that should have used TOMS but did not are technically eligible to amend returns. After Sonder, however, most operators will find their previous TOMS treatment has been narrowed, not broadened. The amendment direction is usually away from TOMS, not toward it.
Is there a VAT grouping option that helps?: VAT grouping can help where the landlord and the operator are connected (eg same group of companies). Intra-group supplies are outside VAT, so the operator's payment to the landlord SPV for the lease becomes a non-supply. The operator then makes a single external supply to travellers. The trade-off is that the group must be eligible (control test) and that joint-and-several liability for VAT applies across the group.
Does the FHL abolition (April 2025) interact with this?: The FHL abolition is a direct-tax change (loss of CGT/IT reliefs for former FHL properties) and is separate from the VAT position. A property let on a serviced-accommodation basis (short-stay with services) is a standard-rated VAT supply regardless of FHL status. Operators that were treating FHL income as outside VAT on the historical FHL-equals-residential-letting framing should review the position; short-stay-with-services has always been a taxable supply at standard rate.

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TOMS VAT for Serviced Accommodation: What Sonder Changed, and What Still Works

What TOMS Is and How It Works

The Conditions for TOMS Eligibility

The Sonder Europe Case in Detail

The Business Model

The First-tier Tribunal Decision (2023)

The Upper Tribunal Reversal (March 2024)

The Financial Impact of Falling Outside TOMS

Operating Models That Still Qualify After Sonder

Buy-In and Resell of Short-Stay Room Nights

Inbound Tour Operator (Traditional TOMS Case)

Corporate Short-Stay Aggregation

Models That Now Fall Outside

Long-Lease-and-Short-Let (Sonder Pattern)

Direct-Owned Serviced Accommodation

Management-Agreement Models (Variable)

What Operators Should Do Now

How VAT Sits Alongside the Wider Property-Tax Position

Frequently asked questions

Need help with your property tax?

Agricultural Property Relief and the £1m Cap: Planning for Mixed Estates

DIY Housebuilders' VAT Refund Scheme: How Self-Builders Reclaim VAT

Serviced Accommodation BPR Eligibility: The Pawson Test

What TOMS Is and How It Works

The Conditions for TOMS Eligibility

The Sonder Europe Case in Detail

The Business Model

The First-tier Tribunal Decision (2023)

The Upper Tribunal Reversal (March 2024)

The Financial Impact of Falling Outside TOMS

Operating Models That Still Qualify After Sonder

Buy-In and Resell of Short-Stay Room Nights

Inbound Tour Operator (Traditional TOMS Case)

Corporate Short-Stay Aggregation

Models That Now Fall Outside

Long-Lease-and-Short-Let (Sonder Pattern)

Direct-Owned Serviced Accommodation

Management-Agreement Models (Variable)

What Operators Should Do Now

How VAT Sits Alongside the Wider Property-Tax Position

Frequently asked questions

Need help with your property tax?

Related articles

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DIY Housebuilders' VAT Refund Scheme: How Self-Builders Reclaim VAT

Serviced Accommodation BPR Eligibility: The Pawson Test