Don’t get sleighed by new VAT rules on boats and aircraft

Thursday, January 06, 2011 | Posted by: Gary Woods
Categories: Business, Personal, Protecting your wealth | Tags: business, tax, HMRC, VAT, Gary Woods, aircraft, residence, jets, flying, planes, sailing, Santa, European Court of Justice, transport, boat

If you’re thinking of trading in your boat or jet for a newer model in 2011, you may find the cost adds up to more than you think. As we’re still feeling festive, let’s take Santa and his sleigh for a ride through the new VAT rules.

Now that Santa has some time on his hands, he may be considering whether to trade in his sleigh for a newer model. High mileage and bodywork that has been subjected to all types of weather may not be in his favour and he may therefore wish to shop around.

Now I don’t know whether Santa is registered for VAT – the sale of image rights and personal appearances make it a possibility – but he would do well to be aware of changes to the VAT rules which could affect his purchase.

Is it a boat?
To the best of my knowledge, the European Court of Justice (ECJ) has not ruled on the VAT status of a sleigh. However, the ECJ has been known to come up with some surprising decisions and it is not inconceivable that the sleigh could be classified as a boat for the purposes of the tax.

Santa should therefore be aware of a recent decision about a new boat purchased in the UK by a Swedish citizen [X v Skatteverket Case C-84/09].

The buyer argued that his use of the boat in UK waters for more than three months after the purchase meant that UK VAT at (the then) 17.5% rate should apply rather than Swedish VAT of 25%, when the vessel eventually arrived in Swedish waters.

The ECJ disagreed and said that the purchasers of new boats and other similar forms of transport cannot pick and choose the member state where the purchase should be taxed. Instead, the taxation must be based upon objective evidence such as:

• the place of residence of the owner;
• the place where the boat is to be registered and normally used;
• the member state flag under which it sails; and
• the place where the boat is normally to be moored and anchored, or where it is to be stored during the winter.

This should be considered at the time that the boat is purchased and not when it arrives in the member state of final destination.

Is it a plane?
Santa could face other problems if the sleigh is classed as an aircraft.

From 1 January 2011, apart from certain use by a state institution, VAT-free status in the UK only applies to an aircraft if it is ‘of a type used by an airline operating for reward chiefly on international routes’ (download HM Revenue & Customs Budget Notice 39 for more information). This means that, irrespective of the size of the aircraft, private purchasers in the UK now have to pay VAT at the standard rate.

Even if Santa can reclaim the UK VAT incurred on the purchase of his aircraft – because it will be used for business purposes – he faces another potential VAT cost.

New rules in the UK mean that where a boat or aircraft costing more than £50,000 is purchased on or after 1 January 2011 and is put to a non-business use, the amount of input VAT that was originally claimed from HM Revenue & Customs will have to be reviewed annually over a five-year period (see Revenue & Customs Brief 47/100).

Where the taxable use has declined during the year, for example because private use has increased, a repayment of input VAT will be necessary. Where business use has increased, a further claim can be made.

What should Santa do?
Now I know what you’re thinking. Santa lives outside the EU at the North Pole. Well that may be so, but he does spend time in the EU in Lapland. He also appears to have several business interests in the UK.

A new sleigh is not something that he will purchase every year and with such a large capital investment, Santa would be well advised to pop down the chimney of specialist advisers before making a commitment that could result in an unforeseen VAT cost.

If he doesn’t, he may not have a very happy new year.

Image: © J E Fee

Gary Woods is Senior VAT Manager at Grant Thornton. For further advice on VAT, contact the VAT specialist in your local Grant Thornton office. Alternatively, email Gary.W.Woods@uk.gt.com.

You might also find these posts useful:

* Trust me, I’m a VAT inspector
* Buy now to beat New Year VAT rate rise? Not necessarily…
* Private jets to lose VAT-free status