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

If you run a serviced-accommodation business, VAT is usually the single largest tax line in your P&L, and the Tour Operators' Margin Scheme is what has kept it manageable for a decade. By taxing your margin rather than your full sale price, TOMS could turn a £1.2m gross-revenue business into a £300,000 VATable turnover for registration and output-tax purposes. On thin margins, the difference between paying 20% VAT on the margin and 20% VAT on the gross is 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. If your model is the long-lease-and-short-let one, your historical TOMS treatment is now at risk, and the cost of getting it wrong runs to six figures a year.

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.

When you fall within it:

• Your relevant turnover is the margin (sale price minus the cost of bought-in services), not your 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:

1. The supply must be of designated travel services: accommodation, transport, restaurant meals, or sightseeing/excursion services.
2. The supply must be made for the benefit of travellers. Travellers includes business travellers and corporate clients booking for their staff.
3. The supplies must be bought in from third parties, not self-provided, and you 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:

1. 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.
2. 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.
3. 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

Suppose your business looks like this:

• 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.
• Your margin: £100,000.

Under TOMS, your 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.

That £160,000 a year swing (£210,000 standard minus £50,000 TOMS) is enough to turn a sustainable operating margin into a loss. There are three realistic responses: pass the VAT through in your nightly rates (easiest in strong-demand locations), renegotiate landlord rents downward (slow and lease-dependent), or restructure to bring properties into your own 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. If this is you, you make a standard-rated supply at full sale price, and you register and account 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

If you have been applying TOMS, work through this in order:

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

If you are designing a serviced-accommodation business in 2026, your 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, so your 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

Your direct-tax position is just as involved. The April 2025 abolition of the Furnished Holiday Letting regime removed income-tax and CGT advantages that many operators had relied on, so your VAT planning has to sit alongside your income tax rates for landlords in 2026/27 and, if you trade through a limited company, your corporation tax rates for property companies in 2026/27.

For a buy-to-let landlord VAT is rarely the dominant tax cost, but for a serviced-accommodation business it is usually the largest line in the P&L. After Sonder, getting it wrong is far more expensive than getting it right, and the safest move is to have your operating model and your historical returns reviewed before HMRC does it for you. If you want a second pair of eyes on where your supply chain falls, we can help.