How and Why Sonder Europe Ltd Might Justify Taking Their Serviced Accommodation VAT Case to the Supreme Court

The recent Upper Tribunal ruling in HMRC v Sonder Europe Ltd has sent shockwaves through the serviced accommodation sector. By disqualifying Sonder from using the Tour Operators’ Margin Scheme (TOMS), the decision imposes a heavy VAT burden on their operations and those of similar businesses. While this ruling creates immediate financial and operational challenges, many are now asking: could Sonder Europe appeal to the Supreme Court?

Appealing to the Supreme Court is no small task. To succeed, Sonder must establish that the case involves points of law of general public importance. Here, we examine the potential legal arguments Sonder might use and the broader implications for the industry.

1. Procedural Grounds

Inconsistencies in Decision-Making

Sonder could argue that the Upper Tribunal misapplied or misinterpreted established principles related to TOMS. They might highlight inconsistencies in how similar operators have been treated in the past, asserting that the Tribunal’s ruling deviates from precedent.

Insufficient Consideration of Evidence

If the Tribunal failed to fully consider evidence supporting Sonder’s case—such as how their long-term leases directly benefit travellers—this procedural oversight could form a basis for appeal. Sonder might argue that this oversight undermines the fairness of the decision.

2. Substantive Legal Issues

Misinterpretation of TOMS Criteria

Sonder’s case hinges on whether their activities align with the requirements of TOMS. They could challenge the Upper Tribunal’s findings on two key points:

• Direct Benefit to Travellers: Sonder might argue that their leasing and furnishing of properties directly benefits travellers by providing short-term holiday accommodation, which aligns with TOMS’ intent.
• Minimal Modification: The Tribunal’s view that furnishing properties constitutes significant transformation could be contested. Sonder could argue that these changes are operational necessities and do not alter the fundamental nature of the properties.

Economic Substance vs. Legal Form

Citing principles established in cases like Westmoreland Investments Ltd v MacNiven, Sonder could argue that the Upper Tribunal placed too much emphasis on legal form rather than economic substance. They might assert that the economic purpose of their operations aligns with the objectives of TOMS, even if the legal structure is unconventional.

Proportionality of VAT Application

Sonder could also invoke the EU principle of proportionality, arguing that applying VAT on the full revenue rather than the margin leads to disproportionate outcomes. They could claim that this undermines the purpose of TOMS, which is to simplify VAT for multi-jurisdictional operations.

3. Broader Policy and EU Law Considerations

Alignment with EU VAT Directive

TOMS is derived from the EU VAT Directive, and Sonder could argue that the Tribunal’s interpretation is inconsistent with EU law. Specifically, they might claim that their operations fulfil the Directive’s aim of simplifying VAT administration for travel operators, including those providing accommodation.

Pre-Brexit EU Law Continuity

As UK VAT laws remain aligned with pre-Brexit EU principles in many areas, Sonder could argue that any deviation from established EU law creates legal uncertainty. This broader issue of continuity could make the case one of significant public interest.

4. Public Interest and Industry Impact

Sonder might frame their appeal as a matter of public interest, highlighting the broader implications for the serviced accommodation sector. They could argue that the ruling disproportionately impacts operators and creates market instability, warranting Supreme Court review to provide clarity for the industry.

5. Errors in the Tribunal’s Reasoning

Categorisation of Leases as “In-House Supplies”

The Tribunal categorised Sonder’s long-term leases as internal supplies rather than services purchased for resale, a key disqualifier for TOMS. Sonder could challenge this categorisation, arguing that these leases are an essential input for their short-term holiday services.

Failure to Consider Operational Realities

Sonder could argue that the Tribunal’s reasoning ignored operational realities, such as the necessity of long-term leases and property furnishings to provide holiday accommodation.

Strategic Considerations for Appeal

Even if Sonder does not believe they can overturn the ruling, appealing to the Supreme Court could be a tactical move. During the appeals process, the current VAT treatment under TOMS might remain in place, allowing Sonder and similar operators to:

• Adapt their business models to align with the ruling.
• Address potential backdated VAT liabilities through restructuring or settlements.
• Advocate for legislative or policy clarification to resolve ambiguities in TOMS.

“An appeal could buy time for the industry to adjust, even if the final outcome is not in Sonder’s favour,” said one tax adviser.

Conclusion

Sonder Europe Ltd has several potential legal arguments to take their case to the Supreme Court. By focusing on procedural inconsistencies, misinterpretations of TOMS criteria, and broader policy implications, they could argue that their case involves significant points of law deserving further review.

Whether Sonder succeeds or not, the industry will closely watch their next move, as the implications of this ruling extend far beyond a single operator. A Supreme Court appeal could provide much-needed clarity for a sector grappling with uncertainty, and at the very least, buy time for operators to adapt to this new VAT landscape.

For now, the question remains: will Sonder Europe take the leap to the Supreme Court, and what might it mean for the serviced accommodation industry if they do?

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