UT (Tax & Chancery) UT/2023/000091 - [2025] UKUT 00014 (TCC)

Mr Macnab for HMRC says that the FTT erred in law in finding that Sonder’s supplies were designated travel services falling within the TOMS Order. A designated travel service for the purposes of the TOMS Order is a supply acquired by a travel agent for the purposes of its business which is supplied onward for the benefit of a traveller without material alteration or further processing. HMRC say that the TOMS Order is not engaged because the bought-in supply of an interest in land from the landlords was not a transaction for the “direct benefit of the traveller” and therefore was not a designated travel service. It was an exempt supply of land and not a taxable supply of holiday accommodation.

In making that submission, HMRC accepted that in determining whether Sonder’s supplies were designated travel services within the meaning of Article 3(1) of the TOMS Order, the FTT was required to construe the TOMS Order itself, and that there is no reference in the TOMS Order to any requirement that the bought-in supply should be for the “direct benefit of the traveller”. That term does however appear in Articles 308 and 310 of the PVD and Mr Macnab submitted that a supply “for the benefit of a traveller without material alteration or further processing” was simply another way of describing a supply for the “direct benefit of the traveller”.

Mr Bremner KC on behalf of Sonder submitted that there is no requirement in the TOMS Order that the supply be for the direct benefit of the traveller. The only requirement is that there is no material alteration or further processing of the supply acquired from the landlord. He submitted that Sonder acquired a right to occupy the apartments for the purposes of its business and supplied a right to occupy the apartments for the benefit of travellers. There was no material alteration or further processing and the supply was therefore a designated travel service within the TOMS Order. The FTT applied the correct test and made an evaluative judgment that there was no material alteration or further processing. We should not interfere with the FTT’s evaluative judgment. Sonder secured the right to use the apartments and supplied the right to use the apartments. He submitted that HMRC were confusing the legal mechanism by which the rights were acquired and supplied, namely a lease and a short licence, with what was obtained and supplied, namely a right to use.

Mr Bremner further submitted that neither the PVD nor the TOMS Order requires the travel agent to acquire a supply of holiday accommodation which is then supplied to customers. The only question is whether Sonder is using supplies made to it in the provision of travel facilities. HMRC are seeking to re-write the statutory test to include such a requirement.

It is common ground that the TOMS Order was intended to implement what are now Articles 306 – 310 PVD. It is also common ground that we must construe the TOMS Order in so far as possible to conform with the requirements of the PVD. It is therefore helpful to consider the objectives of the special scheme set out in the PVD. Those objectives were conveniently described in a Commission Staff Working Document published by the European Commission on 17 February 2021.

The Sixth VAT Directive in 1977 introduced a special scheme for travel agents and tour operators due to the special nature of that industry. The services offered by such businesses usually consist of a package of services, in particular transport and accommodation acquired from third parties. Those third parties will often be based in different EU member states. The packages are then sold by travel agents or tour operators, acting in their own name, by way of a single supply to their customers. The complexity and location of the services acquired mean that it would be administratively difficult to apply the normal VAT rules on place of supply, taxable amount and deduction of input tax.

The special scheme was therefore intended to pursue two main objectives:

Case law of the CJEU has confirmed that the special scheme does not only apply where the services acquired comprise multiple services which are packaged together, or only where there is a cross-border element as between the services acquired and the services supplied by the travel agent. Hence, in Van Ginkel Waddinxveen BV and others v Inspecteur der Omzetbelasting, Utrecht Case C-163/91 [1996] STC 825 the CJEU held that the scheme applied to a travel agent providing only accommodation to customers which had been supplied by third parties. In Customs and Excise Commissioners v Madgett and BaldwinC-308/96 and C-94/9 [1998] STC 1189, the Court of Justice held that the scheme applied to a travel agent acquiring and supplying services within a single member state. We refer to both these authorities in more detail below.

It is also worth noting that the special scheme and the TOMS Order are intended in principle to be tax neutral. Hence, over the chain of supplies the VAT accounted for by the travel agent and third parties making supplies to the travel agent will be the same. Ultimately, the burden of VAT will fall upon the purchaser of the package (see Advocate General Sharpston in European Commission v Spain Case C-189/11 at [7] and [8]). Having said that, if the purchaser of the travel facilities is a VAT registered business, it will bear the burden of VAT on the travel agent’s margin rather than the final consumer because the purchaser will not be entitled to reclaim input tax where the travel agent accounts for VAT pursuant to the TOMS Order.

Both parties sought to draw support for their submissions as to the correct test to be applied in construing Article 3(1)(b) TOMS Order from a number of authoritative decisions of the CJEU. In our judgment, those decisions do not support the case of either party. It appears that the issue raised in this appeal is a novel issue which has not previously been considered by the CJEU or in any domestic UK authority to which our attention has been drawn.

The first decision of the CJEU is Van Ginkel, referred to above. In that case the taxpayer offered ‘motoring holidays’ in the Netherlands to its customers. Customers used their own vehicles and the taxpayer supplied travel accommodation. Customers were accommodated in bungalows, most of which were owned by third parties.

The CJEU held at [27] that the fact that transport was not arranged for the traveller by the travel agent and that the traveller was merely provided with accommodation did not exclude the supplies from the special scheme, at that time contained in Article 26 Sixth VAT Directive:

Mr Macnab says that it was implicit in the case that what was bought-in by the travel agent was holiday accommodation. It is said to be implicit because of how the Court described the supplies, for example at [3] where it is said that the taxpayer arranged “the travel accommodation” and at [9] where it is said that the taxpayer “lets holiday dwellings”.

We consider that Mr Macnab is reading too much into such references. The judgment does not identify the nature of the bought-in supply and in our view it is authority only for the proposition at [27] of the Court’s judgment.

Similarly, Mr Bremner submitted that the present case was indistinguishable on its facts from Van Ginkel. We do not consider that is the case, given that the judgment in Van Ginkel does not describe the nature of the supplies which the taxpayer bought-in.

The next decision of the CJEU is AlpenchaletsResorts GmbH vFinanzamt München Abteilung KörperschaftenCase C‑552/17. In that case, the taxpayer rented residences in Germany, Austria, and Italy from their owners which it then let to individual customers as holiday rentals. The circumstances are described at [12]:

The CJEU identified the question at [19]:

The Court said as follows in answer to that question:

We can see from these passages that the CJEU was assuming that the owners of the accommodation were taxable persons who were making taxable supplies. Mr Macnab says that it is clear that the travel agent must have bought-in holiday accommodation. That inference arises from references such as that at [25] to “the supply of a holiday residence bought in from third parties”. Although we accept that the language is consistent with Mr Macnab’s submission, we do not consider that we can safely draw that inference. In our view the case is simply authority for the proposition stated at [35]. When the CJEU referred to holiday accommodation being rented from other taxable persons we do not consider that it was describing a condition that what was being bought-in must be holiday accommodation. The existence of such a condition did not fall within the scope of the argument before the Court and was not clearly part of the question referred.

Similarly, Mr Bremner submitted that Sonder’s case is indistinguishable on the facts from Alpenchalets. He submits that the following factors were irrelevant to the analysis of the CJEU: 1) the terms on which the taxpayers rented the accommodation; 2) the nature of the owners’ businesses; 3) whether the customers could have obtained the accommodation directly from the owners; and 4) the VAT treatment of the supply from the owners to the taxpayers.

It is true that the matters identified by Mr Bremner did not form any part of the CJEU’s analysis, but that is because the issue before the CJEU was limited to whether the PVD special scheme was applicable in circumstances where the travel agent made a single supply of travel accommodation which was not part of a package of supplies. That is not the same as the issue with which this appeal is concerned.

Mr Macnab also relied on the decision of the CJEU in Madgett, referred to above. In that case, a hotel in Devon sold packages to customers from the north of England covering half-board accommodation, transport by coach from various pick-up points and a day coach excursion during their stay. The transport services were obtained from third parties. The taxpayer argued that it was not within the TOMS Order on the ground that it was a hotelier and not a tour operator.

The CJEU held at [20] that the special scheme applied not only to travel agents and tour operators but also to traders effecting identical transactions, such as hoteliers. It also held at [47] that where the package supplied included transactions consisting partly of services supplied by the taxpayer and partly services supplied by other taxable persons, the special scheme applied solely to the services supplied by third parties.

Mr Macnab particularly relied on what was said by the Court at [23] and [34]:

Mr Macnab submitted that this was authority for a proposition that what is acquired from a third party supplier must be travel services and that the third party supplier must itself be in the business of supplying travel facilities. That was why the Court used the word “entrust” in [23]. He also relied on what is said at [34], that the special scheme in the PVD should be applied “only to the extent necessary to achieve its objective”.

We do not consider that Madgett is authority for Mr Macnab’s proposition. In our view he is reading too much into the word “entrust”. The questions before the CJEU did not involve consideration of the nature of the supply made by the third parties. The Court was not saying that the special scheme was only engaged when a third party was entrusted by a taxable person with making a supply to the traveller. We agree with Mr Bremner that the Court was not addressing the question of whether the special scheme only applied to services obtained from persons who themselves carry on business in the supply of travel services. It was simply describing the circumstances of that case where the taxpayer had entrusted the supply to a third party.

Mr Macnab also referred us to Dyrektor Krajowej Informacji Skarbowej v C. sp. ZooCase C-108/22 where the taxpayer was a “hotel services consolidator” which purchased and resold holiday accommodation without any other services. The question referred in that case was set out at [19]:

The Court cited Alpenchalets at [28]:

The Court answered the question at [30]:

We do not consider that C Sp zoo takes HMRC’s case any further. A hotel services consolidator is certainly within the special scheme, but it does not mean that the special scheme is limited to similar businesses. The Court was simply concerned with the particular facts of the case.

We therefore do not accept that any of the CJEU authorities establish the principle relied on by Mr Macnab to the effect that the special scheme only applies where a travel agent has bought-in travel facilities which are then supplied onwards to travellers. That is not to say that the principle is not correct. It is simply that the issue raised by HMRC is not the subject of previous authority.

It is common ground that the TOMS Order must be construed in so far as possible to conform with the requirements of the PVD. We are required to construe what is meant in the TOMS Order when it refers to a supply “for the benefit of a traveller without material alteration or further processing”. We must do so consistently with the requirements of the PVD in so far as possible.

The thrust of Mr Macnab’s submissions on Ground 1 was that the FTT did not take that approach because it failed to consider whether the exempt supply of land to Sonder by landlords was supplied onwards by Sonder for the direct benefit of the travellers. He submitted that this is a condition for the application of the TOMS Order, construed in conformity with the PVD, and that Sonder’s supplies did not satisfy the condition because it acquired exempt supplies of an interest in land and then supplied taxable travel accommodation to travellers. Essentially, Sonder was not making onward supplies of bought-in services but was making supplies of what some of the authorities refer to as “in-house” services.

In the Decision, the FTT recognised that the PVD contained a requirement that the bought-in services must be for the direct benefit of the traveller, because it identified that requirement in its summary of the PVD at [8]. However, the FTT did not go on to consider whether the requirement in the PVD that a supply be for the direct benefit of the traveller affected how it should construe what amounted to a material alteration or further processing of the bought-in supply for the purposes of the TOMS Order. The question we must consider is whether the FTT correctly construed the TOMS Order in the light of the requirements of the PVD.

The FTT did raise the question of whether the TOMS Order was consistent with the PVD at [16] of the Decision:

Although the FTT recognised that the phrase “without material alteration or further processing” was not language used in the PVD (see [8]), it is notable that in this paragraph the FTT makes no reference to any requirement of the PVD that the supply must be for the direct benefit of the traveller. It states that the PVD merely requires that the third party supplies should be used to provide the travel facilities. Nor does the FTT make any reference to such a requirement in its discussion at [62] – [65] and [76] – [78].

Mr Bremner’s first submission was that, despite the FTT’s summary at [8], the special scheme in the PVD does not include any requirement that the services bought-in must be supplied “for the direct benefit of the traveller”. He argued that the conditions for the special scheme are set out in Article 306 (as is apparent from the language of Article 307) and the only relevant question for present purposes is whether the bought-in supplies were used to make supplies to travellers. If there was a change to the supply that was bought-in then it would not fall within the scheme because it was not being used to make supplies to travellers. It would be the travel agent’s own “in-house” supply.

Mr Bremner submitted that the only references in the PVD to services being for the direct benefit of the traveller are in Articles 308 and 310. Article 308 is simply concerned with computing the costs that are to be taken into account in calculating the margin on which VAT is payable. It is not setting out any further conditions. He said that the purpose of Article 308 in referring to costs for the direct benefit of the traveller is to exclude from the computation costs which are not sufficiently closely related to the supply, such as advertising costs or office costs. Article 310 is simply concerned with ensuring that there is no input tax deduction in respect of supplies falling within the special scheme. Neither Article imposes requirements or conditions for the application of the special scheme.

Mr Bremner also submitted that what the FTT said at [8] of the Decision was consistent with this analysis. The FTT was not setting out the conditions to be satisfied before the special scheme applied. It was simply including within its description of the special scheme how the margin is calculated. If the FTT was in this paragraph setting out conditions for the special scheme to apply, he accepted that it must follow on Sonder’s case that the FTT erred in law in that respect.

We do not accept Mr Bremner’s submissions. We acknowledge that the only references to a transaction being for the direct benefit of the traveller appear in Articles 308 and 310 of the PVD. It is also the case that Article 308 is dealing with the calculation of the margin where the scheme applies and Article 310 blocks the recovery of input tax on bought-in supplies. However, in identifying the circumstances in which the special scheme applies we consider that it is necessary to look at the structure of the special scheme as a whole, as it is set out in Articles 306 to 310.

Article 308 describes the margin as the difference between the total amount exclusive of VAT paid by the traveller and the actual cost to the travel agent of supplies provided by other taxable persons. Mr Bremner contends that the special scheme applies to supplies where the bought-in supplies are used to provide travel facilities. However, where those supplies are not for the direct benefit of the traveller then they are excluded when calculating the margin and can be the subject of an input tax deduction.

We cannot see any reason why the special scheme would create a separate category of supply which falls within the scheme but outside the scheme calculations. In the present case there is only one bought-in supply. On Mr Bremner’s case, if that supply is not for the direct benefit of the traveller then the bought-in supply is not taken into account in computing the margin and there is no restriction on the input tax deduction. Presumably the taxpayer would end up accounting for VAT in the usual way as if the special scheme did not apply. In our view, Mr Bremner’s construction of the PVD would add a layer of complexity which would not be necessary or consistent with the objectives of the special scheme.

Accordingly, for the reasons given above, we are satisfied that construing Articles 306 – 310 as a whole, for supplies to fall within the EU special scheme the supplies bought-in must be supplied for the direct benefit of travellers.

Mr Bremner then submitted that if, as we have found, the PVD contains a requirement that the bought-in supply must be supplied for the direct benefit of travellers, that requirement was not found in the TOMS Order. Further, the TOMS Order could not be construed so as to contain the requirement because that would be to re-write the domestic legislation. He said that the principle set out by the CJEU in Marleasing SA v La Comercial Internacional de Alimentación SA Case C-106/89 (“the Marleasing principle”) could not be applied to give a conforming construction.

The Marleasing principle was set out at [8] of Marleasing:

We had only brief submissions from the parties on the Marleasing principle. The principle was summarised by the Court of Appeal in Vodafone 2 v HM Revenue and Customs [2009] EWCA Civ 446 at [37] and [38] (omitting citations):

In Test Claimants in the FII Group Litigation v HMRC [2012] UKSC 19, Lord Sumption described Marleasing as authority for a “highly muscular approach” to construing national legislation.

Mr Bremner noted the limitations to the Marleasing principle. We do not propose to embark on a detailed analysis of the authorities, especially when the parties themselves did not do so. We can simply say that we are satisfied that we must endeavour to construe the TOMS Order in a way which conforms with the requirement we have found in the PVD that for the special scheme to apply, the bought-in supply must be supplied for the direct benefit of travellers. In our judgment that is what the TOMS Order meant when it defined a designated travel service as a supply for the benefit of a traveller without material alteration or further processing.

HMRC submitted to the FTT that to fall within the scheme a travel agent supplying holiday accommodation must have bought-in holiday accommodation. The scheme did not apply in circumstances where Sonder had not bought-in holiday accommodation. The FTT rejected that submission at [61] – [65]. It held that there was no requirement for the supplies to be identical, although it does not appear that HMRC’s submissions went that far. The FTT also held that the purpose to which the apartments had been put by the landlords was irrelevant to the VAT treatment of the onward supply by Sonder. It went on to consider at [70] – [76] HMRC’s submission that a change from leasing the apartments for a term of years to letting them as holiday accommodation amounted to a material alteration or further processing. It applied the same reasoning as it had applied in [62] – [65] to find that there was no material alteration.

As we have said, it is notable that the FTT did not in these paragraphs seek to construe the TOMS Order in light of the direct benefit requirement found in the PVD. Indeed, it was only in relation to the apartments which were acquired unfurnished and then furnished by Sonder in order to make supplies of holiday accommodation that the FTT considered that any issue of conformity arose. However, at [78] the FTT concluded that it did not need to consider whether exclusion from the scheme of supplies which were materially altered or further processed was consistent with the PVD.

We turn now to consider what is meant in the context of the PVD by the requirement that a bought-in supply must be the subject of transactions which are for the direct benefit of the traveller. It seems clear to us that this requirement is reflected in the TOMS Order by the definition of designated travel services as a bought-in supply which is supplied for the benefit of a traveller without material alteration or further processing.

Mr Macnab suggested in his skeleton argument and appears to have argued before the FTT that as a matter of principle where a taxpayer acquires an exempt supply and then makes a taxable supply of travel facilities, the supplies cannot fall within the TOMS Order. That is because there must have been a material alteration in the supply merely by reason of the difference in VAT treatment. He also relied on an argument that on a proper construction of the TOMS Order, HMRC should collect VAT on the total consideration charged by Sonder to its customers. That is essentially an argument that where a trader acquires an exempt supply and then makes a taxable supply of travel facilities, the supplies could not fall within the TOMS Order.

In oral submissions, Mr Macnab accepted that HMRC’s case could not be put that highly. He accepted that exempt supplies could conceivably be included in a package of travel facilities to which TOMS might apply. Whilst we accept that the TOMS is intended in principle to be tax neutral, we accept Mr Bremner’s submission that in the context of special schemes, perfect VAT neutrality is not attainable.

The more limited submission on which Mr Macnab relied in oral argument was that on the facts of this case there had been a material alteration or further processing in the service supplied because Sonder had acquired interests in land for terms of several years and had supplied short term holiday accommodation to travellers. The supplies could not have been for the direct benefit of travellers because there was no scenario in which a traveller could buy travel accommodation directly from the landlords. The landlords did not supply short term travel accommodation. They were supplying long term interests in land.

The FTT held at [73] and [74] that what is altered or processed must be “the thing supplied, i.e. the apartment”, rather than the characterisation of the supply for VAT purposes. The FTT referred to Finanzamt Heidelberg v ISt internationale Sprach- und Studienreisen GmbH Case C-200/04 [2006] STC 52 in support of that finding. We do not need to consider ISt further, given that Mr Macnab no longer contends that a change in the treatment of the supply from exempt to standard rated will in itself amount to an alteration or processing for these purposes.

The FTT described the test it was applying to the apartments generally at [76] of the Decision. However, in describing what it considered to be the test, the FTT did not have regard to the need to construe the definition of designated travel services in Article 3 of the TOMS Order consistently with the requirements of the PVD, i.e. that the bought-in supply must be supplied for the direct benefit of the traveller. It is convenient to quote [76] again:

Mr Macnab did not specifically criticise this general formulation of the test in his submissions, and Mr Bremner said that it offered a helpful proxy for testing what was a material alteration. However, we do not consider that it is necessary or desirable to restate the test in a way that goes beyond the language of the TOMS Order and the PVD. That is because all cases will turn on their own facts. It ought to be sufficient to say that the scheme will apply where there has not been a material alteration or further processing of the bought-in supply such that what is bought-in is not supplied for the direct benefit of the traveller. That is the test the FTT was required to apply.

In the last sentence of [62], the FTT stated that there is no requirement that the bought-in supplies must be identical to the supplies provided by the tour operator to the traveller. That must be right on any view, and HMRC did not suggest otherwise. Mr Macnab did describe “the scenario envisaged” by the TOMS as being one of “back to back supplies” or “re-supplies” by the trader buying in services from third parties which are themselves carrying on business in the travel sector. Again, we do not consider that these alternative descriptions of the test are very helpful. Indeed, they tend to suggest that the bought-in supplies must be identical to the supplies provided to the traveller which is not the case. The terms used by Mr Macnab are therefore apt to confuse the real issue.

Mr Macnab also submitted that the FTT also erred in law at [73] and [74] of the Decision. It described the “thing supplied” as “the apartment” and “the apartments themselves”, when in fact what was supplied was an interest in the apartment. Sonder acquired grants of leases for a term of years to occupy the apartments from the landlords. More particularly, it acquired the right to use the apartments as serviced apartments for the residential occupation of one or more occupiers. This was a materially different service from Sonder’s supply of short term licences to travellers to occupy the apartments as holiday accommodation.

The FTT repeated what we consider to be a misdescription of the service supplied at [77] when it came to consider the unfurnished apartments. It refers to the apartments being supplied “without changing their structure” and notes that any changes “to the apartments” were cosmetic or decorative and did not amount to processing of “the apartment”.

In our view, a focus on alterations to the apartment as the thing supplied, without sufficient regard to alterations in the rights granted in relation to the apartment as the service supplied, was an error of law. Although the FTT refers at [72] to letting the apartments for a term of years and then letting them as holiday accommodation, and concludes that the change did not amount to a material alteration or further processing, the question of materiality is only analysed by reference to the physical changes made to the apartment itself. Although the paragraph also cross-refers to [65] where the FTT states that the TOMS Order requires that the “right to use the apartments” was acquired and supplied without material alteration or further processing, there is no explanation as to why that is the case in relation to the totality of the right rather than the later explanation of the alterations made to the physical thing.

Mr Bremner correctly submitted that we should read the Decision as a whole and adopt a realistic analysis of the Decision. However, looking at the Decision as a whole it appears to us that at [73], [74] and [77] the FTT fell into error in focussing on the apartments themselves as the service supplied and the physical changes to the apartments themselves as the applicable alterations. In particular, at [77] the FTT ought to have been considering whether there was any material alteration or further processing of the term of years in an unfurnished apartment supplied by a landlord in circumstances where what was supplied to the traveller was a short term licence to occupy furnished holiday accommodation.We accept that the nature of the physical changes to the actual apartments are relevant to the test which the FTT ought to have been applying, but the FTT did not compare the alterations to the full bundle of rights and interests supplied to Sonder with those which were supplied by Sonder to travellers in order to assess the materiality of those alterations.

For these reasons, we are satisfied that the FTT fell into error in the test which it applied pursuant to Article 3(1)(b) of the TOMS Order because it failed to have regard to the requirement that the bought-in supply must be for the direct benefit of the traveller, and mischaracterised the precise nature of the supplies to which the test is to be applied. These were material errors of law and we must allow the appeal and set aside the Decision.