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

In essence, HMRC’s case was that, to come within TOMS, a trader must have bought in holiday or hotel accommodation which the trader then uses to make onward supplies of such accommodation to travellers. Sonder leased the apartments from the landlords for a term of years with no stipulation that they must be used for the provision of accommodation for travellers. Sonder used the leased apartments to make supplies of short term accommodation to travellers. Mr Macnab’s submission was that those supplies did not fall within the TOMS because they were supplies made from Sonder’s own resources.

I do not accept Mr Macnab’s submission that in order for a supply of holiday accommodation to fall within the TOMS, the tour operator must have bought in holiday accommodation. I do not find that requirement in the EU special scheme as set out in the PVD or in the TOMS Order. Nor, in my view, can it be inferred. Article 306 of the PVD simply refers to “supplies of goods or services provided by other taxable persons [which are used] in the provision of travel facilities”. The TOMS Order states that goods or services acquired for the purposes of the tour operator’s business and provided for the benefit of a traveller without material alteration or further processing are within the scope of the TOMS. In neither case is there any further requirement that the bought-in supplies must be identical to the supplies provided by the tour operator to the traveller.

Although it may be that the bungalows in Van Ginkel were holiday accommodation or second homes rather than ordinary residential property used for holidays, that fact is not mentioned in the judgment. The ECJ referred to “holiday accommodation” in [24] and [27] but that only referred to what was provided by the travel agent and not by the landlords. In Alpenchalets, the Advocate General referred to the properties as “houses” and the CJEU used the term “residences”. The only mention of “holiday accommodation” and “holiday rentals” again referred to the supplies made by Alpenchalets Resorts GmbH and not the supplies by the owners. I conclude that whether the bought-in accommodation was or was not “holiday accommodation” was not a factor in the ECJ’s reasoning in Van Ginkel and Alpenchalets.

In my view, the nature or characteristics for VAT purposes of the goods and services supplied by third parties to the tour operators do not determine whether onward supplies fall within the TOMS. The purpose to which the apartments had been put by the landlords was irrelevant to the VAT treatment of the onward supply of those apartments by Sonder.

In order to be a designated travel service and come within the TOMS, the TOMS Order only requires that the right to use the apartments was acquired by a tour operator for the purposes of its business before being supplied for the benefit of a traveller without material alteration or further processing.

The first question is whether Sonder was a tour operator for the purposes of the TOMS. It is clear from Madgett and Baldwin and ISt that the terms ‘travel agent’ and ‘tour operator’ are to be interpreted broadly. Any business that provides services which are the same as or comparable to those provided by travel agents or tour operators within the normal meaning of those terms is itself a travel agent or tour operator for the purposes of the EU special scheme. That is reflected in section 53(3) VATA.

The apartments were used by Sonder as serviced apartments for the residential occupation of travellers. There was no suggestion that the apartments were used as permanent or long term accommodation and, during the relevant period, the average length of stay was only five nights. Sonder used the apartments to provide temporary accommodation for persons who did not reside in them as their homes. I conclude that such persons were travellers and the apartments were, therefore, travel facilities (in the terms of Article 306 PVD) and for the benefit of travellers (as required by section 53(3) VATA). I also find that the provision of accommodation in self-contained apartments is the type of service that was commonly provided by tour operators or travel agents. Indeed, I did not understand Mr Macnab to contend otherwise. I conclude that Sonder was a tour operator for the purposes of the TOMS during the relevant period.

I have already concluded in [62] to [65] that the fact that the terms on which the landlords let the apartments to Sonder and Sonder let them to the travellers and that the VAT treatment of their respective supplies were different did not mean that Sonder had not made onward supplies of the apartments for the purposes of the TOMS. For similar reasons, I consider 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.

In my view, the object of the alteration or processing must be the thing supplied, ie the apartment, not the characterisation of the supply for VAT purposes. In ISt, the German government submitted that the EU special scheme should not apply to exempt services of language training and education which formed part of the programmes offered. The CJEU rejected this argument in [39] as follows:

The CJEU’s response in ISt shows that the EU special scheme still applies even where an exempt supply to a tour operator changes to a supply chargeable to VAT, albeit on the margin, when supplied by the tour operator as part of travel facilities. It follows that the correct question in this case is whether the apartments themselves, and not the tax status of their supplies, were materially altered or further processed before they were supplied by Sonder to the travellers.

It seems to me to be clear from the nature of the TOMS that “material alteration or further processing” must refer to more than minor changes or processes which do not affect the fundamental character of the particular goods or services. It would be absurd as well as impracticable if any minor change or processing excluded a bought-in supply from the TOMS. In order to be excluded from the TOMS, I consider that the alteration and processing must change the goods or services supplied so that what is supplied by the tour operator cannot be described in the same terms as the items acquired.

I do not consider that it matters whether the apartments were furnished or unfurnished when they were acquired by Sonder. In both cases, Sonder supplied the apartments to the travellers without changing their structure. The evidence shows that any changes that Sonder made to the apartments were cosmetic or decorative, such as painting a wall or providing furnishings and decorative items. In the case of the unfurnished apartments, Sonder additionally acquired the furnishings which were needed to enable it to provide the apartment to the travellers. The nature of the changes that were made were such as they could be reversed simply by removing the items of furniture or re-painting a wall. In my view, such changes cannot be described as material and do not amount to processing of the apartment.

The UK notion of alteration and further processing does not appear in Directive. Nowhere in ECJ case law does it say that bought-in supplies that are altered or subject to processing must be excluded from the EU special scheme. As I have concluded that furnishing an apartment did not constitute a material alteration to that apartment or further processing of it, I do not need to consider whether the exclusion from the TOMS of goods or services which have been materially altered or processed by the tour operator is consistent with the EU special scheme in the PVD.