VAT Update – November 2023

9 Nov 2023

vat update abstract graphic

In this month’s VAT Update, we consider whether providers of holiday accommodation can apply the Tour Operators’ Margin Scheme (TOMS) following a recent case. We also take a look at cases on reclaiming import VAT, varying a VAT group retrospectively, and the extent to which intra-VAT group services are subject to VAT. Finally, HM Revenue & Customs (HMRC) has eliminated paper VAT registration application forms for all but a specific group of taxpayers.

Back in July a First-tier Tax Tribunal (FTT) decision was released in an interesting case related to hotel/serviced accommodation: Sonder Europe Ltd v HMRC [2023] UKFTT 610. Whilst the decision does not set a legal precedent, it is understood that HMRC have appealed the decision. It’s speculated that if HMRC were to lose at the Upper Tier Tribunal (UTT), which would set a binding legal precedent, it could lead to a wider review of HMRC’s position on the TOMS, and if it could be scrapped entirely.

The case examined how Sonder accounted for VAT on self-catering accommodation, provided in self-contained apartments, to corporate and leisure travellers. Lettings ranged from a single night to a month or more. Sonder leased the apartments from third-party landlords in return for annual rents. The letting to Sonder by the landlords were exempt from VAT, however the letting of the accommodation by Sonder to travellers and visitors was subject to VAT at the standard rate, because the grant of a right to occupy serviced accommodation is specifically excluded from the land VAT exemption.

The issue was the basis on which Sonder calculated the VAT due on its supply of the accommodation. Under normal VAT accounting, VAT would be due on the full amount paid by the guest. However, under TOMS VAT is only due on the profit margin, which is, broadly, the difference between the amount paid by Sonder to the landlord and the amount received from the guest. For example, where Sonder paid £90 to the landlord for the accommodation and charged the guest £120, the VAT saved was £15, calculated by the difference between VAT being paid out of the £120 (£20) and VAT out of Sonder’s £30 (£5) margin. The VAT at stake in this case was over £250,000. The Tribunal had to decide: did Sonder’s supplies fall within the scope of TOMS? Note that TOMS doesn’t just apply to tour operators, something often overlooked. It can apply to anyone providing services for the benefit of travellers, which are the kind of services that are commonly provided by tour operators or travel agents.

Sonder didn’t see itself as a ‘tour operator’, but it did:

  1. Buy-in the accommodation for the purposes of its business; and
  2. Provided the accommodation:
    a. For the benefit of travellers.
    b. Without material alteration or further processing.

Further, the accommodation was of a kind commonly provided by tour operators. Sonder clearly acquired accommodation from landlords for its business and provided this to travellers.

However, HMRC argued that Sonder’s supplies didn’t fall within the TOMS because Sonder didn’t make onward supplies of the leased residential accommodation but used the leased property to make an in-house supply of accommodation, like a hotelier. HMRC argued that you had to buy-in holiday accommodation and re-supply it to be within TOMS. The Tribunal rejected this argument. It was sufficient that it acquired services which it re-supplied for the benefit of a traveller. In order to be within the TOMS, Sonder also had to provide the apartments for the benefit of travellers without material alteration or further processing.

Landlords provided Sonder with a mixture of furnished and un-furnished apartments. Sonder then used a third-party to add the required items to the unfurnished apartments before making them available to guests. The furnishings included beds, sofas, armchairs, coffee and side tables, chairs, bookcases and lamps as well as smaller decorative items and basic kitchen utensils. Sonder did not alter the fabric or the structure of the apartments and arranged for a third-party to clean the properties, as it was required to keep the interiors clean and tidy, and in the same condition as at the start of the lease, it was also required to replace any damaged fixtures and fittings.

On this point the Tribunal thought that it must refer to more than minor changes and it didn’t consider cosmetic or decorative, such as painting a wall or providing furnishings and decorative items, materially altered the apartments, neither did the addition of furnishings or furniture that could be easily removed.

Sonder therefore didn’t materially alter the accommodation and was correct to use TOMS as the means to calculate the VAT on its supplies, according to the FTT.


The TOMS is not an optional scheme – if it applies, it applies. However, businesses in this sector often try to structure their supplies to fall in or outside of the TOMS. The scheme can clearly provide a VAT benefit to providers of holiday and serviced accommodation, including furnished holiday lets, where accommodation is re-supplied and no VAT is incurred on this. Note that VAT cannot be reclaimed on cost components of margin scheme supplies.

Another factor to consider is that under the TOMS you cannot issue VAT invoices, so where visitors are business travellers who may be entitled to recover VAT, this does make the scheme less attractive. Utilising the TOMS based on the Tribunal’s decision in Sonder could lead to significant VAT savings, but businesses need to work through the implications and consider that the case is currently being appealed. Because of this, it cannot be guaranteed that the UTT will reach the same decision, or that HMRC won’t pull the rug out and do away with TOMS altogether. However, if the UTT reaches the same conclusion this could produce positive VAT savings for businesses involved in the letting of serviced apartments, furnished holiday lets and holiday accommodation.

If you’d like to discuss further, please get in touch with John Butterfield VAT Director.

Sonder Europe Ltd v HMRC – tribunal decision

In 2021 the First Tier Tax Tribunal (FTT) struck out an appeal by Dollar Financial UK Ltd (DFUK) on the basis that HMRC had not made an appealable decision when rejecting DFUK’s request for the date its US parent company joined its VAT group registration to be backdated, a matter which is not permitted by law. The US parent company had created an establishment in the UK earlier than the date DFUK had applied for it to be registered in the VAT group.

The Upper Tax Tribunal (UT) considered DFUK’s appeal on a number of grounds including that DFUK had made a valid application for amend the VAT group as described under the relevant VAT grouping legislation, and also that a valid application did have legal effect with a right of appeal.

The UT rejected DFUK’s appeal on all grounds.


VAT group registrations provide the opportunity for supplies between VAT group members to be disregarded for VAT purposes. In this case, whilst DFUK and its US parent company were registered together in a VAT group, for the period between when the US parent company joined the VAT group and when it first became established in the UK for VAT purposes, the VAT on services received by DFUK from its parent resulted in a significant VAT cost because DFUK was not able to fully reclaim this VAT.

The case serves as a useful example of being alive to the opportunity of VAT grouping at the most appropriate time to affect the most efficient VAT outcome.

VAT law, generally, doesn’t permit actions with respect to VAT group (application for creating one, or an amendment to the date a company joins a VAT group, as in the case of DFUK) to be backdated. Proactive planning is always recommended, particularly in situations where VAT costs could arise in the form of irrecoverable VAT. If your company is eligible to register or join a VAT group, seek advice first.

The fact that the US parent company was permitted to join the DFUK VAT group at all rested on it being established in the UK for VAT purposes, which would typically mean it has a branch or similar fixed establishment. Companies must be established in the UK for VAT purposes to be able to register or join a VAT group.

If you’d like to discuss whether VAT grouping would create a more VAT efficient structure within your corporate group, please get in touch with Nick Hart, VAT Director.

Dollar Financial UK Ltd appeal – tribunal decision

In JPMorgan Chase Bank NA v HMRC [2023] TC8957, the First Tier Tribunal (FTT) concluded that services provided by one VAT group member to another were subject to VAT. There are two technical points to this case – the first being that in some circumstances intra-VAT group supplies are not disregarded and VAT is accountable, and the second is the regular subject of VAT tribunal cases, the single or multiple supply question.

In this case, the VAT group comprised a UK Plc company (the Plc) and an overseas company by virtue of it having a UK branch. The overseas company supplied the Plc with services comprised of various back-office type functions and also operational and technology services enabling the Plc to conduct its trading. To provide the back-office services, the overseas company acquired certain services from another party. That these specific services should be subject to VAT under a reverse charge was not disputed. The usual position for intra-VAT group supplies being disregarded for VAT purposes, is overridden in these instances under specific legislation.

The appeal arose from HMRC raising assessments with respect to the other services, as well as arguing that they couldn’t be distinguished from the back-office service, and a single supply was being made by the overseas company to which VAT should be applied on the full value.

The FTT ruled that based on the circumstances of how the services were provided to the Plc, and the wording of the Master Services Agreement between the companies, there was a single supply without there being a predominant element. The whole supply therefore defaulted to being subject to VAT, in the view of the FTT.


A single supply of services which comprises a number of elements does not necessarily always have a predominant element. In this case, the FTT felt the close connection between all elements of the services being provided, the fact they were all essential for the Plc to operate, and that the Plc could not refuse to accept any element, meant that elements were equally necessary and it therefore wasn’t possible to identify a predominant element. The fact that an element of the services was subject to specific rules which prevented them from being disregarded under the intra-VAT group rules, meant that VAT was due on the total.

It’s usually the case that intra-VAT group supplies are not subject to VAT, which is one of the main benefits of VAT grouping. However specific rules apply which override this disregard when a VAT group purchases certain services through an overseas establishment of a member of the same VAT group. In these circumstances, VAT is accounted for through the VAT group as a reverse charge. Reverse charge VAT is not always recoverable in this instance; it would be likely that the VAT group wouldn’t have been able to reclaim this VAT given the financial services sector it operates in. This case further serves as a reminder that VAT grouping is not always going to result in VAT efficiencies across the board.

If you’re considering a VAT group registration or would like a health check of your current VAT group registration, please get in touch with Nick Hart, VAT Director.

JPMorgan Chase Bank NA appeal – tribunal decision

The recent First-tier tribunal (FTT) case of Piramal Healthcare Ltd v HMRC (2023) UKFFT 891 considered the entitlement to reclaim import VAT paid on importing goods into the UK.

Piramal Healthcare Ltd (Piramal), a pharmaceutical company based in the UK, imported pharmaceutical goods into the UK and historically paid import VAT on the value of these goods. The goods, active pharmaceutical ingredients (API) were owned by an overseas-based supplier who had developed the API, and that party retained ownership. Piramal supplied various services to that party with respect to the API and ultimately the drug product was later either sent back to the owner, sent to third parties or to medical facilities for clinical trial purposes. Piramal did not make any onward supply of goods.

Whilst Piramal was making taxable supplies of services which gave it input tax recovery entitlement, this (according to HMRC in October 2018) didn’t entitle it to reclaim import VAT on goods it didn’t own and didn’t have the right of disposal over. The API did not form part of an onward supply by Piramal. HMRC assessed for over-claimed VAT. HMRC had earlier, in January 2018, advised Piramal it was correctly reclaiming import VAT.

Piramal appealed the assessment on the principle point of input tax recovery entitlement and also on the grounds HMRC were allowing taxpayers in similar circumstances to reclaim import VAT until 14 July 2019, as announced in its Revenue and Customs Brief 02/19.

The FTT rejected the appeal in relation to the underlying principle of import VAT recovery. The import VAT paid by Piramal was not available as input tax on the basis that, whilst the imports were used in relation to the business, they hadn’t been used as a cost component in any onward supply made by Piramal. This is because they hadn’t acquired the goods.

Piramal’s appeal against HMRC’s decision to deny input tax credit and to assess VAT for the VAT period 11/18 was allowed, as the VAT in question was incurred on or before 5 November 2018. The FTT deemed Piramal had not had ample time to update their procedures as they were told by HMRC in January 2018 that their treatment was correct, only for HMRC to consider the treatment in April 2018 and concluded the treatment was incorrect in October 2018, with the return period in question coming only a month later.


Whether or not import VAT is recoverable as input tax for the importing the goods is dependent on a number of factors, including who is declared importer of record, who owns the goods (has right of disposal) at the time of import, and whether the imported goods form part of an onward taxable supply, or are to be used in a taxable business. UK companies pay more import VAT now than was previously the case pre-Brexit, and so it’s important to get import VAT recovery right. It’s not simply the case of who pays it can claim it back. The issue can be particularly prevalent in the pharmaceutical sector, where API and finished drug products are being processed and handled by service providers who don’t own them and aren’t making onward supplies of them.

If you’re importing goods and paying import VAT with respect to goods you don’t own and aren’t making an onward supply of, it’s best to seek advice. If you’re importing goods that are subject to processing in the UK before being re-exported, Inward Processing Relief can be applied, which means import VAT is either not payable on import or is paid and later refunded, subject to conditions being met.

For advice, please get in touch with Nick Hart, VAT Director.

Piramal Healthcare Ltd v HMRC – tribunal decision

The VAT1 paper VAT registration application form is being removed from use by HMRC from 13 November 2023. This step is to encourage applicants and their agents to use HMRC’s online VAT registration service, which HMRC maintain is the quickest and most secure method of applying to be registered for VAT.

In taking this step, HMRC acknowledges some taxpayers will not be able to use the online service for a number of reasons and they will need to obtain a VAT1 paper form from the VAT Helpline service.

As well as businesses which are unable to use digital technology, this will also apply to businesses applying for exception from registration, overseas partnerships, and persons or entities that have not yet been issued a Unique Tax Reference (UTR) by HMRC for other tax purposes. For example, new limited companies or LLP’s seeking to register as soon as they’re incorporated will need to obtain a VAT1 from the VAT Helpline, as they will not be able to use the online service if they have not yet been issued with a UTR by HMRC following their incorporation.


It’s hoped that the online VAT registration service will be revised to enable applicants without a UTR to be able to use it to lodge their VAT registration applications. Obtaining and submitting a paper form in these circumstances isn’t efficient, and a particular concern is that a submission reference number isn’t issued by HMRC when a paper VAT1 is submitted.

Any steps HMRC take to make the VAT registration process generally more efficient would be welcomed, as delays with applications are still being experienced, and without the opportunity to chase up applications until 40 working days following a submission, its taxpayers are still frustrated as they face commercial and cash flow challenges.

For further details, please get in touch with Nick Hart, VAT Director.

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Sean McGinness
Partner, Edinburgh

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Sean is Head of the Edinburgh office.