Constable VAT Focus 21 July 2023


How VAT affects charities (VAT Notice 701/1)
In the above guidance, section 6.1.3 ‘Construction’ has been updated to include information about the 2-stage test that is used to assess whether a charity is conducting a business and, in that context, can benefit from the zero-rate relief that applies to some construction services. Section 6.1.4 has been added dealing with ‘Certificates issued to get certain construction works at zero rate’.

Barristers and advocates (VAT Notice 700/44)
In the above guidance, the VAT811 form has been replaced as the legislation quoted on the form has been updated.


First Tier Tribunal

1. Tour Operators Margin Scheme

This appeal concerns the Tour Operators Margin Scheme (TOMS) which is a special VAT scheme that applies to certain supplies made by travel agents and tour operators for the benefit of travellers.

From 2017, Sonder Europe Limited (Sonder) provided accommodation (self-contained apartments) in the UK to corporate and leisure travellers. Sonder leased the accommodation from third party landlords and in effect sublet the apartments to travellers for different periods, ranging from a single night to a month or more.

In VAT accounting periods ending 10/17, 01/18 and 04/18, Sonder accounted for VAT on the basis that its supplies fell within the scope of the TOMS.  In 2019, HMRC decided that the TOMS did not apply to the supplies made by Sonder, with the result that the full value of those supplies was subject to VAT at the standard rate, with VAT totalling £252,229.29 being due. The issue considered in this appeal was whether Sonder’s supplies fell within the scope of the TOMS.

For its supplies to come within the scope of the TOMS, Sonder needed to establish that:

  • it was a tour operator as defined by Section 53(3), VATA 1994, and
  • its supplies were designated travel services within Article 3(1) of the TOMS order.

Sonder was a tour operator for the purposes of the TOMS, and its supplies were designated travel services, if Sonder:

  • acquired the accommodation for the purposes of its business;
  • provided the accommodation for the benefit of travellers and without material alteration or further processing, and
  • the accommodation was of a kind commonly provided by tour operators.

Sonder argued that it was a tour operator because its position was indistinguishable from that of tour operators. Sonder brought in supplies of accommodation and made onward supplies of that accommodation to travellers.

HMRC argued that renting exempt residential accommodation and then subletting it to travellers does not fall within the TOMS. HMRC’s primary case was that a trader who made supplies of travel accommodation from its own resources was essentially a hotelier, not a tour operator.

The Tribunal first considered whether Sonder was a tour operator for the purposes of the TOMS. 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 accommodation and the average length of stay was five nights. The Tribunal concluded that such persons were travellers and the apartments were travel facilities and for the benefit of travellers. It also concluded that Sonder acquired services (leased apartments) provided by the landlords for the purposes of its business.

Some of the apartments that Sonder leased were unfurnished.  To fall within TOMS a purchased supply must be resold “without material alteration or further processing”.  HMRC took the position that in furnishing and equipping the unfurnished apartments Soder was making a sufficiently material alteration to the supplies that it was receiving to take the subsequent supply by Sonder outside the scope of TOMS. The Tribunal disagreed deciding that the words “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.’

As a consequence of its findings on these two points, the Tribunal found that during the relevant periods Sonder was a tour operator and its supplies were designated travel services that fall within TOMS.  Sonder’s appeal was allowed.

Constable Comment: Under a TOMS calculation it is not possible to reclaim VAT incurred on goods and services purchased for use by the traveller (as opposed to general business overheads). 

When the costs purchased for use by the traveller are subject to VAT the VAT declared on the margin is broadly the same as the net VAT liability that would arise if the VAT on those costs was reclaimed and VAT is declared on the full sales (standard VAT accounting rules).  When the costs of goods and services purchased (before being sold on to the traveller) do not attract VAT then applying VAT to the margin results in a lower overall VAT cost to the business.  Thus accounting for VAT on the margin achieved resulted in a lower net liability because Sonder incurred no irrecoverable input VAT as a result of applying TOMS. 

This case involves several interesting points and two stand out. 

a) The nature of “in-house supplies”

The term “in-house” supplies usually refers to supplies that are made using a suppliers “own resources” within the framework of a TOMS calculation.  For example, HMRC policy is that when a supplier who is operating TOMS owns a hotel and supplies accommodation, they are making an “in-house” supply of accommodation.  Therefore, by implication the decision goes a step further than saying TOMS should apply to Sonders supplies and is relevant to businesses that is unquestionably liable to operate a TOMS calculation (as regards which elements of a package should be treated as “in-house” when applying that TOMS calculation).     

Where a TOMS operator owns the property that it is supplying (e.g. a freehold) then there is no “service received” that can be resold and its supplies would be “in-house”.  However, the question arising in that context is what constitutes ownership. Current HMRC guidance states that if the supplier hires, leases or rent accommodation under an agreement that gives them responsibility for maintenance of the fabric of the building the supplier is making an in-house supply of accommodation.  In this case Sonder’s had basic maintenance obligations in relation to the properties that it leased.  The Tribunal did not view that as a barrier to applying a margin scheme calculation. 

The Tribunal held “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”.   This suggests that the dividing line that HMRC has drawn between “in-house” and “margin scheme” supplies is wrong.  This could have wide implications, not only in relation to accommodation.

b) Material alteration and processing

To fall within TOMS a purchased supply must be resold “without material alteration or further processing”.  The Tribunal decided 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.’   The fact that accommodation was leased in an unfurnished state and then supplied after furnishing did not amount to “material alteration or further processing.”  

There are many situations in which HMRC takes the view that “assembling the components” of the onward supply converts a “bought in” supply into an “in-house” supply.  The judgement therefore may have implications that go beyond the lease and resupply of accommodation.

Assessing the impact of this case is difficult.  It considered a period in which the UK was in the EU.  That said, it is hard to see how the interpretation of UK law would magically change because of Brexit.

The decision is a First-tier Tribunal Decision.  This means that it is only binding on the parties to the case.  HMRC could decide not to appeal and simply ignore the decision, forcing other taxpayers that wish to apply the decision to litigate.

Finally, TOMS was introduced as a simplification measure intended to remove the need for EU tour operators to VAT register in every EU member state in which they provide travel services.  Post Brexit, the use of the TOMS as an EU scheme is no longer available to businesses established in the UK.  It serves no purpose insofar as the simplification benefit that it once delivered to UK businesses.  We understand that it was retained in the UK only because of industry representations to HMRC along the lines “It would be disruptive for us to change the way that we are currently accounting for VAT.” However, HMRC could simply decide to abolish TOMS if it starts to deliver VAT outcomes that it dislikes, although clearly that could not be done retroactively.

In our view this decision is likely to be appealed but where businesses feel they may have overdeclared VAT then they should certainly lodge protective claims, bearing in mind that there is a 4-year cap on seeking refund claims and if they wait to do so pending any appeal then they will find that claims that could be made today will fall out of time due to the statutory 4-year cap.


Since the end of the transitional period on 31 December 2020 European Court judgements are not binding on the UK in most cases. However, it is expected that UK courts will still take these judgements into consideration and there may be occasions where they have a more binding effect.

2. Tourist tax: Consideration for a supply?

This case concerns a state-recognised air spa town (Gemeinde A) whose spa administration is managed as a government-operated business under municipal law and qualifies as a commercial business for the purposes of corporation tax laws. Gemeinde A collects a spa tax in order to cover the costs of erecting and maintaining the facilities provided for spa and leisure purposes and for the events organised for that purpose. The following are subject to the spa tax:

  • Persons staying in the municipality who are not resident in the municipality and who are offered the opportunity to use those facilities and to participate in those events
  • Residents of the municipality, the focal point of whose life is in a different municipality
  • Non-local persons staying in the municipality for professional reasons to attend conferences or other events

The spa tax is not collected from day visitors, non-local persons or residents working or undergoing training in the municipality. The spa tax is set, for non-local persons, at a certain amount per day of stay and, for resident persons, at an annual flat-rate amount payable irrespective of the duration of their stay.

Between 2009 and 2012 Gemeinde A financed the erection, maintenance and renovation of the spa park, spa building and footpaths (the spa facilities) with the revenue from the collection of that tax. Gemeinde A took the view that the spa tax constituted remuneration for an activity subject to VAT, namely the operation of a spa establishment, and claimed a deduction of the VAT paid on all the input services which had been provided to it and which were connected with tourism.

An audit was carried out and the auditor disregarded the amounts of input VAT paid which were not linked to the operation of the spa business and took into account the amounts of input VAT paid which related to the spa building only in so far as that building was leased for a fee. Therefore, VAT amendment notices were issued in accordance with the findings of the audit.

Gemeinde A brought an appeal to the Federal finance Court in Germany which is the referring court. The court referred the following questions to the Court of Justice:

  1. Does a municipality which imposes a ‘spa tax’ on visitors staying in the municipality (spa guests) for the provision of spa facilities carry out, by providing the spa facilities to the spa guests in return for a spa tax, an economic activity if the spa facilities are in any event freely accessible to everyone?

The court concluded that Article 2(1)(c) of the VAT directive must be interpreted as meaning that the provision of spa facilities by a municipality does not constitute a ‘supply of services for consideration’.  The obligation to pay the spa tax is not linked to the use of those facilities but to the stay in the municipal territory and the spa facilities are freely and gratuitously accessible to everyone.

Constable Comment: The court’s decision in this case seems to us to have been predictable.  For there to be a supply there needs to be “something provided”, “consideration paid” and a “direct link between those two elements.  That link is missing if someone is obliged to make a payment irrespective of whether they will receive a service.  Whether there may have been an alternative argument to support a recovery of VAT is hard to say but on the narrow point of whether the tourist tax was consideration for a supply it is difficult to argue with the court’s reasoning.

3. VAT margin scheme for intra-community art supplies

Mr Mensing is an art dealer established in Germany who operates art galleries in a number of German cities. In 2014, works of art originating from artists established in other Member States were supplied to him and those supplies were declared in the Member States where the artists are established as exempt intra-community supplies. Mr Mensing paid acquisition VAT in Germany on those supplies.

The following questions were referred to the Court of Justice:

  1. In circumstances such as those at issue, in which a taxable person relies, on the basis of the judgement on the fact that the supply of works of art that were supplied to him or her in the context of an exempt intra-community supply by the creator also falls under the margin scheme is the taxable amount to be determined exclusively on the basis of EU law, with the result that it is not permissible for the national court adjudicating at last instance to interpret a provision of national law to the effect that the tax due on the intra-community acquisition does not form part of the taxable amount?
  2. Should Articles 312 and 315 be interpreted as meaning that the VAT paid by a taxable dealer in respect of the intra-community acquisition of a work of art, the subsequent supply of which is subject to the margin scheme under Article 316(1), forms part of the taxable amount of that supply?

After considering the facts, the court ruled that the VAT paid by a taxable dealer in respect of the intra-community acquisition of a work of art, where the subsequent supply is subject to the margin scheme, does form part of the taxable amount of that supply.

This is convoluted language and may be confusing to the reader.  In essence the question can be considered as “Does the acquisition VAT incurred and paid to the German tax authorities form part of the “purchase price”.  If it can be treated as part of the purchase price, then that will reduce the margin on which VAT is payable in respect of the sale. If it does not the acquirer is paying acquisition tax on the purchase and also declaring VAT on an increased margin, a form of double taxation.

The relevant legislation, in setting the purchase price, refers to consideration paid to the supplier.  Acquisition VAT paid to the German tax authority is not consideration paid to the supplier from whom the goods have been purchased and cannot be treated as part of the purchase price.

The court held that the acquisition VAT that Mr Mensing paid and could not reclaim could not be treated as part of the purchase price.

Constable Comment: The point of most interest in this case is its implication on how EU law should be interpreted.  Both Mr Mensing and the European Commission took the view that that a strictly literal interpretation of Articles 312 and 315 and the first paragraph of Article 317 of the VAT Directive fails to take account of the objectives pursued by those provisions.  In particular, the Commission noted that to interpret Article 312 of the VAT Directive as meaning that the purchase price of a work of art should include acquisition VAT (as Mr Mensing argued) would avoid double taxation and distortion of competition.  The court accepted that point but held that “where the meaning of a provision of EU law is absolutely plain from its very wording, the Court cannot depart from that interpretation”.  Although that is in line with previous decisions it is a point of general application.

4. The VAT treatment of directors’ fees

In the UK the remuneration paid to directors is treated as outside the scope of VAT (effectively they are treated as employee who are not conducting an independent economic activity). That approach is not adopted uniformly within the EU.  However, a case has been referred from Luxembourg to the CJEU that may clarify the situation.  At this stage a decision has not been delivered but the Advocate General has provided an opinion, which in most cases the court will follow, see Opinion of Advocate General Case C-288/22

TP is a lawyer and a member of the board of directors of several public limited companies incorporated under Luxembourg law. As a member of those boards, he undertakes decision making in relation to the accounts, risk management policy and in developing proposals to be put to shareholders’ meetings. The day-to-day management of two of the companies is caried out by an executive committee made up of the chief executive officers or executive directors. The implementation of decisions taken by the company is generally entrusted to the employees of the company and not to individual members of the board of directors.

In 2020, the tax authority in Luxembourg subjected the directors’ fees received by TP in 2019 to VAT and this was later confirmed on the grounds that a member of the board of directors of a company carries out an economic activity independently since it is permanent and gives rise to remuneration in return for the activity carried out.

The tax authority argued that the permanent nature of the activity results from the fact that members of the board of directors are appointed for a term of up to six years. TP receives remuneration which is decided upon by the general meeting of shareholders on a proposal of the board of directors. The remuneration means that the members of the board of directors, even if they are not shareholders, have an interest in the success of the activities of the company.

TP brought an action before the District Court in Luxembourg who then referred the following questions to the Court of Justice:

  1. Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out an ‘economic’ activity within the meaning of Article 9 of the VAT Directive? Also, are percentage fees received by that person to be regarded as remuneration paid in return for services provided to that company?
  2. Is a natural person who is a member of the board of directors of a public limited company incorporated under Luxembourg law carrying out his or her activity ‘independently’, within the meaning of Articles 9 and 10 of the VAT Directive?

The Advocate General has proposed that the court answers these questions as follows:

  1. Article 9(1) of the VAT Directive must be interpreted as meaning that the existence of an independent economic activity must be determined by means of a typological comparison. The decisive factor in that regard is whether, in the context of the necessary overall assessment, the person concerned, as a typical taxable person does, bears an economic risk personally and acts on his own economic initiative, which it is for the referring court to ascertain.
  2. In that regard, it follows from the principle of neutrality of legal form that a natural person who is a member of a body of a company which is required by law and who receives remuneration for that activity as a member of that body cannot in this respect be regarded as carrying out an independent economic activity.

In short, VAT should not be chargeable on directors remuneration.

Constable Comment: This seems to us a reasonable conclusion and in line with existing UK policy.  In our opinion it is unlikely that the UK would change its stance regardless of the court’s decision in this case.  However, for businesses operating in the EU a decision that directors fees attract VAT would be problematic for VAT exempt businesses and a decision that required a case-by-case evaluation of the facts would create uncertainty, unnecessary work for businesses and potentially encourage convoluted remuneration structures.

Please note that this newsletter is intended to provide a general overview of the subject. No liability is accepted for the opinions it contains or for any errors or omissions. Constable VAT cannot accept responsibility for loss incurred by any person, company or entity as a result of acting, or failing to act, on any material in this blog post. Specialist VAT advice should always be sought in relation to your particular circumstance.