Can you escape the VAT clampdown on private jets?

Monday, June 27, 2011 | Posted by: Graham Brearley
Categories: Personal, Protecting your wealth | Tags: tax, VAT, legislation, Graham Brearley, aircraft, jets, private jet, European Commission, legislation change, flying, executive jet, airline, zero-rating

Flying your own plane or executive jet got a lot more expensive this year following a change in the UK VAT law on the supply or importation of private aircraft. Aviation specialist and Senior VAT Manager at Grant Thornton, Graham Brearley, explains why and calls for a simplification of the law.

After 38 years, the UK’s VAT rules for dealing with the supply of aircraft have been changed to bring them into line with the rest of Europe. Why it has taken so long for the European Commission to enforce these changes is beyond me.

It’s not as if it has only recently discovered that the UK’s rules were not compatible with the VAT directive: it has known about it for a very long time.

Perhaps it has turned a blind eye to the historic UK regime because, in fairness, it worked and was understood by all. Unfortunately, although still in its early stages, the same cannot be said about the new EU-compliant regime.

Zero-rating shifts from weight to usage
In simple terms, under the old regime the VAT liability of the supply of an aircraft depended on its weight. The weight of an aircraft is easily established (it is published in the aircraft’s manual). If this was less than 8,000kg, the aircraft did not qualify for zero-rating.

Under the new rules, to qualify for zero-rating the aircraft must be one that is used by an airline operating for reward chiefly on international routes.

What counts as a qualifying aircraft?
Essentially, the aircraft will be a ‘qualifying aircraft’ for VAT zero-rating if all of the following apply:

• The aircraft is to be used by an airline – this is defined as an undertaking that operates passenger or freight transport services.
• It is providing such transport in return for consideration – normally payment in money.
• The airline as a whole operates chiefly, ie more than 50%, on international routes – as opposed to domestic routes.

A shock for some private jet owners
It means that no matter what size the aircraft, unless these conditions are met, VAT will now be payable at the standard rate of 20% on the purchase of an aircraft in the UK or on the importation of the aircraft into the UK.

This has come as something as a shock to those owners who, owing to the size of the aircraft, formerly benefited from zero-rating.

As of 1 January 2011, unless the owner operates the aircraft for reward chiefly on international routes, the supply or importation of it will be subject to VAT at 20%. Considering that the average private jet could set you back between £3 million and £10 million, adding another 20% is likely to have a major impact on the market. Indeed, a good friend of mine is a private jet captain and is increasingly concerned about the future of private ownership in the UK and for his job security.

Can you operate as an airline?
Unfortunately, this is not a situation that can be easily got round. It is not simply a question of the owner hiring out the aircraft so that he is treated as an airline. There are stringent CAA rules relating to the provision of ‘Public Transport’ on aircraft. To provide legal charters of the aircraft or the transport of passengers, the owner would have to operate the aircraft under an Air Operator’s Certificate, which involves going through a lengthy and expensive process.

An owner could lease the aircraft to an operator who, in turn, may be regarded as an ‘airline’ for VAT purposes, but this will require the owner both to register for VAT and to incur VAT on the cost of purchase, and then also claim the VAT back through his VAT registration.

Part-ownership or renting option
All of this adds to the burden of ownership and is another reason why an owner may elect not to buy outright, but simply buy time on an aircraft or go down the fractional ownership route.

Either way, the new regime is not good news for owners. It is far too complicated and far too easy for mistakes to occur, which can carry heavy penalties. One can only hope that someone in HM Revenue & Customs will recognise this and make appropriate changes to the law.

Image: © Yorick R

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