The Rent to Serviced Accommodation (R2SA) business model has long been marketed as a cost-effective and profitable way to enter property investment.
However, a recent ruling made by the ‘Upper Tribunal’ in favour of HMRC overturning a previous decision made in the ‘First-Tier Tribunal’ might well instigate many changes as to how the sector operates, and should be seen as a critical warning for any R2SA investors, sourcing agents or deal packagers operating this way.
The Ruling in HMRC’s Favour That Changes Everything
The recent HMRC v Sonder Europe Ltd Upper Tribunal ruling has redefined the landscape for R2SA operators. Previously, many businesses relied on the Tour Operators’ Margin Scheme (TOMS) to reduce their VAT liabilities.
However, the ruling found that many R2SA operations actually do not qualify for TOMS, leading to new, serious and potentially previously unrealised VAT implications.
Key Findings of the Ruling
Long-term leases If a property is leased on a long-term basis from the owner and sub-let as short-term accommodation, it will not qualify under TOMS for services purchased for resale.
Property modifications If a property is adapted for use or furnishings are added it will be disqualified from TOMS, as there should only be ‘minimal processing’. That means the property leased from the owner should have minimal changes carried out to it. A lot of R2RSA operators adapt the structure and provide furniture in all of the rooms before making available as short-term lets, such a property would fail to meet and qualify for TOMS.
Full value of their supplies rather than just their profit margins. This could result in up to a 20% increase in tax liability.
Backdate VAT assessments by up to 4 years—or even up to 20 years in cases where deliberate misrepresentation could be proved.
There could have a huge financial impact on R2RSA providers following this ruling and the risk of financial loss from a back dated VAT claim or the affects on future business and the the sectors viability as a whole cannot be overstated. Many businesses may find themselves unable to meet the back dated VAT bills and go out of business completely.
Serious Risks of Backdated VAT
One key aspect of the ruling investors should very much be aware of, is the possibility of historical VAT liabilities.
Many R2SA operators who were unaware of their ineligibility for TOMS may now face years of unpaid or underpaid VAT, along with penalties and interest.
Even more alarmingly, HMRC has hinted at the possibility of pursuing directors personally in certain circumstances:
- Fraud or Misrepresentation – If deliberate underreporting of VAT or misuse of TOMS is found.
- Negligence or Recklessness – Failing to adhere to VAT regulations or neglecting to seek tax advice.
- Improper Use of Company Funds – Directors who have taken dividends or loans while VAT liabilities were unpaid could face accusations of misuse.
For many, the combination of backdated liabilities, penalties, and the personal financial risks involved is a potential path to insolvency.
Advice If You Are Involved or Sourcing a R2SA Model
If you are directly involved with the R2SA model or are sourcing opportunities for others, there are several essential steps you should take immediately.
Investors:
- Review Your Assets: Assess all properties under your R2SA business model with the help of a tax specialist to identify potential liabilities.
- Consult a VAT Expert: As a matter of urgency to help you review your assets, business structure and what VAT, if any may be outstanding.
- Once you understand what payment may be required by HMRC, approach them voluntarily to work through and make the appropriate payment.
Deal Packagers and Sourcing Agents:
- Communicate Risks Clearly: If you are providing R2SA opportunities to clients, make sure you convey the potential risks associated with VAT compliance.
- Review Training Programmes: Be cautious of property courses or strategies heavily reliant on TOMS as a tax-saving strategy. These may be non-compliant under current regulations.
While the R2SA model itself isn’t inherently unworkable, businesses must ensure that all aspects of their operations are set up as true short-term serviced accommodation and fully compliant with VAT rules.
R2SA Changes Need to Happen
The Sonder Europe ruling is a reminder of the importance of compliance and careful financial planning within property investment.
For years, property courses have talked about the R2SA model as a simple way to achieve financial independence, however these same courses often overlooked the complexities and risks of VAT compliance.
It’s now clear that this model comes with significant caveats. From sourcing agents to investors, anyone involved in R2SA must do their due diligence to avoid costly surprises from HMRC.
Whether you’re an investor wondering if you’re exposed, or a deal packager advising others on R2SA opportunities, now is the time to prioritise compliance and secure your business.
