VAT and the Acquisition of Yachts

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HM Revenue & Customs (HMRC) have increased their focus on structures designed for high net worth individuals to incur little or no VAT on the purchase of pleasure craft (both sailing and motor vessels). An increased number of investigations typically involve artificial leasing or chartering structures. It is unclear at this stage whether HMRC will extend their scope of investigation to structures involving aircraft such as planes or helicopters.

Of course, there are many bona-fide businesses who charter and lease pleasure craft. The aim of this briefing note is to briefly describe the key features of the structures, clarifying HMRC’s VAT treatment applying to the purchase and use of pleasure craft, and in particular, the chartering and leasing of pleasure craft. The term ‘pleasure craft’ is used to describe motor and sailing yachts which are designed for recreational use.

HMRC are aware that structures involving a company (or an entity such as a limited liability partnership) have been used by individuals to obtain a VAT advantage. Put simply, this arises where an individual who has funded the purchase of a pleasure craft arranges for legal ownership of that vessel to be held by a company (or other entity) which registers for VAT as a chartering or leasing business and recovers VAT incurred on the purchase and operation of the vessel. The individual’s own use of the vessel is covered by charter or lease agreements issued to him in the name of the company. As a result, it is claimed that there is no private use of the vessel.

HMRC will consider the entitlement of such a company (or other entity) to VAT registration by applying the normal rules to identify whether the chartering or leasing comprises an ‘economic activity’. The connection between the company and the user of the vessel does not in itself prevent the chartering or leasing being an economic activity.

On the other hand, merely issuing charter agreements to the individual in the name of the company is not, alone, sufficient to create an economic activity. The full circumstances in which the vessel is used will be considered.

HMRC may also consider whether the structure amounts to an abusive practice.

The principle of prohibiting abusive practices ‘applies to the sphere of VAT’. That means it applies to all aspects of VAT and not just the right to recover VAT on purchases. Where HMRC conclude that a structure meets the tests for an abusive practice then HMRC will consider appropriate action to restore the situation that would have existed in the absence of the abusive transactions. This might include issuing assessments to disallow VAT incurred on purchases and/or deregistration of the entity concerned. Such assessments might also give rise to interest charges and penalties.


23 September 2009

 

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The information in this notice is intended for general guidance only. Throgmorton does not accept any responsibility for losses incurred to any person acting or refraining to act as a result of the information in this notice. Advice should be taken in the context of specific circumstances.