Commissioners of HM Revenue and Customs v Sonder Europe Ltd

Taxation – Value added tax – Tour Operators’ Margin Scheme – Apartments leased to respondent and used to provide short term accommodation to travellers – Appellant commissioners appealing against decision of First-tier Tribunal that TOMS applied to supplies of accommodation – Appellants appealing – Whether supplies of designated travel service – Whether requirement that bought-in supply used for direct benefit of travellers – Appeal allowed The respondent supplied accommodation in the UK to corporate and leisure travellers. The respondent leased self-contained apartments from third party landlords for periods between two and ten years. It then granted licences to travellers to occupy the apartments for periods ranging from a single night up to a month. During the relevant VAT periods the average stay in an apartment by a traveller was five nights. The provision of holiday accommodation in the UK was subject to a VAT rate of 20%. However, the Tour Operators’ Margin Scheme (TOMS) could reduce the VAT payable, as it allowed businesses to pay VAT only on the margin. The TOMS was promulgated under the Value Added Tax (Tour Operators) Order 1987 which implemented the requirements of articles 306 to 2010 of Directive 2006/112/EC (the Principal VAT Directive)). The respondent accounted for VAT pursuant to the TOMS on its margin (ie, the difference between the total amount, exclusive of VAT, payable by the traveller and the cost to the respondent payable to the third party landlords). The appellant commissioners contended that the respondent’s supplies did not fall within the TOMS and the respondent ought to have accounted for VAT at the standard rate on the value of supplies to travellers. The appellants assessed the respondent to VAT of £252,229 for the relevant VAT periods. The First-tier Tribunal held that the TOMS applied to the supplies of accommodation and allowed its appeal. The appellants appealed. Held: The appeal was allowed. (1) For present purposes, the tribunal was concerned with the question whether the supplies received by the respondent from third party landlords were supplied onwards for the benefit of travellers “without material alteration or further processing” within the meaning of article 3(1)(b) of the Value Added Tax (Tour Operators) Order 1987. The agreements between the respondent and the landlords were “internal repairing insuring” leases. The respondent was responsible for keeping the apartments and any furnishings provided by the landlord as they were when the lease was entered into. If any damage was caused to an apartment such as a broken TV or a scratch on the wall, it was the respondent’s responsibility to replace the TV and repair the damage to the wall. The apartments had to be delivered up in their original condition at the end of the lease. Any walls that had been painted had to be repainted and items added had to be removed. (2) Any business that provided services which were the same as or comparable to those provided by travel agents or tour operators within the normal meaning of those terms was itself a travel agent or tour operator for the purposes of the TOMS. That was reflected in section 53(3) of the Value Added Tax Act 1994. The overarching issue was whether the respondent satisfied article 3(1)(b) of the TOMS Order which provided that supplies would only be “designated travel services” where they were supplied “for the benefit of a traveller without material alteration or further processing”. The question was whether the FTT correctly construed the TOMS Order in the light of the requirements of the principal VAT Directive. (3) The obligation on the English courts to construe domestic legislation consistently with Community law obligations was both broad and far-reaching. The only constraints on the broad and far-reaching nature of the interpretative obligation were that the meaning should go with the grain of the legislation and be compatible with the underlying thrust of the legislation being construed. The tribunal had to endeavour to construe the TOMS Order in a way which conformed with the requirement in the principal VAT Directive that for the special scheme to apply, the bought-in supply had to be supplied for the direct benefit of travellers. That was 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: Marleasing SA v La Comercial Internacional de Alimentación SA (Case C-106/89) [1990] ECR I-4135 and Test Claimants in the FII Group Litigation v HMRC [2012] UKSC 19 considered. (4) 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 had to be for the direct benefit of the traveller, and mischaracterised the precise nature of the supplies to which the test was to be applied. Those were material errors of law and the FTT’s decision had to be set aside. Looking at the facts as a whole, the tribunal was satisfied that the service which was supplied by the respondent to the traveller was materially altered from that which was supplied by the third party landlord to the respondent having regard to the direct benefit requirement. (5) The supply which the respondent made was a short term licence to the traveller to occupy property it had leased as holiday accommodation. Overall, the way in which the traveller’s licence to occupy was described indicated that there was no reason to think that those terms would be any different to the basis on which a hotel or similar establishment might offer accommodation for the benefit of travellers, which was the basis on which the TOMS Order was said to apply in the first place. It was a very different bundle of rights from those which were granted to the respondent by the landlords. The fact that both the respondent’s rights under its leases with the landlords and a traveller’s rights under its licence from the respondent both gave rights of occupation did not mean that what the respondent acquired was supplied to the traveller without material alteration or further processing such that it was supplied for the direct benefit of the traveller. The services supplied by the landlord to the respondent were not for the direct benefit of the respondent’s own customers. The services supplied by the respondent to the traveller were its own in-house supplies, which therefore fell outside the ambit of the TOMS.  Andrew Macnab (instructed by General Counsel and Solicitor for HM Revenue and Customs) appeared for the appellants; Jonathan Bremner KC (instructed by KPMG LLP) appeared for the respondent. Eileen O’Grady, barrister Click here to read a transcript of Commissioners of HM Revenue and Customs v Sonder Europe Ltd