Flying Group - Getting around BIK

[Oxeagle]

Afternoon chaps,

I have been toying with the idea of a flying group for a while now, and although I feel that the best way of structuring the group would be as a Private Limited Company that owns the aircraft, I understand that there are some issues with Benefit In Kind.

As far as I understand it, if any of the directors or employees of this company use the aircraft they can be done for BIK. So, if a family member or friend set up a company (or possibly used an existing company) and the group members paid this company for the use of the aircraft as customers, would this get around BIK?. Are there any major flaws in doing this?

Cheers,


Ox

[Mike Cross]

There's no need to get that complicated.

If you pay the same as any other user and the income covers the costs then you are not getting a BIK. If you charge yourself less than you charge everyone else then you are getting a BIK.

[IO540]

The matter isn't as simple as that Mike. Some inspectors go after any limited company ownership scenario, on the basis that it was not set up to make money. The main defence would be either (a) all pilots being [part] owners, and/or (b) none of the directors having any access to the aircraft. PM me Mike if you would like more details.

I think having the company owned and controlled by an unrelated (and non-flying) persons (you need two at least) would be a great idea. Not a family member though, IMHO.

[Oxeagle]

IO540,

Firstly thank you for all of your previous help on this issue. Lets say a friend of mine has a private limited company; his company 'owns' the aircraft and each of the members pays a monthly and hourly charge to use the aircraft. Is this a realistic setup?

This is the only issue I can foresee - although the aircraft is owned by the group members, it would legally be property of the company, so how would the group members go about buying and selling a share in an asset they don't legally own? How could the scheme be setup so that the group members have some kind of legal ownership of the aircraft even with it being 'owned' by the company?

Cheers,


Ox

[Mike Cross]

The matter isn't as simple as that Mike. Some inspectors go after any limited company ownership scenario, on the basis that it was not set up to make money.
Absolutely, and precisely why I said
and the income covers the costs
HMRC will expect you to at least break even within a reasonable period of time, which you will be if the income covers the costs (which include depreciation). If your accounts conform to Financial Reporting Standards (which they will be required to) and show at least a break even AND you pay the same as everyone else then there should not be a problem.

You don't need to make a loss to attract the attention of HMRC. You run a car sales company and make 100k profit. During the course of the year you sold yourself for 10k a car the company paid 25k for. You can expect HMRC to be feeling your collar for the Tax and NI on the 15k you trousered on the deal. Now let me see sir 15k after tax at 40%, that's 10 grand you owe us, plus the employer's and employee's NIC's. Oh and while we're at it we'll have a mitigating penalty and statutory interest as well, just make the payee HMRC sir, thank you.

Mike

[rateone]

Oxeagle,

The answer to your question is that you can't. The legal entity is the Company which was formed to own and operate the aircraft. If you are looking for upfront contribution of capital towards the aircraft then the Group Members are effectively buying shares in the Company. One would assume that these shares come with voting rights that allows shareholders to exercise rights over the operation of the company and therefore each "Member" has input to decision making but they have no legal title to the a/c.

To set up a Limited Company, requires the usual registration (available at a number of on-line organisations for very little cost). You will need at least two Officers (including a Company Secretary). You will also need to submit audited and approved accounts (in accordance with the rules laid out in the Companies Act) so you will also need an accountant. This will add to the opex.

In the case you quote in which your friend's company owned and operated the aircraft, Group Members would have no legal ownership - I doubt if your friend wants a lot of new shareholders - so there is no advantage to you.

Mike Cross is right re the BIK as long as you are covering the full cost of operating the aircraft, the Officers are paying the same as all other users and you can show this in bona fide annual accounts (see above) then you should have no problem. In actual fact, you should be making a slight profit - how else will you pay for the new engine, unforseen maintenance, repaint/retrim, or upgrades (Mode-S anyone?).

There are many Groups that operate in this way so I think you should be OK but why are you going through the hassle? What's wrong with the straight Joint Ownership and a properly drafted Syndicate Agreement?

[Southern Cross]

You are better off setting up a limited liability partnership (which can be registered for VAT) because there is no issue with BiK on an LLP.

[IO540]

I am not going to go over all this again; I've done it several times. Suffice to say that HMRC seems to be changing tactics.

To start with, one has to decide how the plane is going to be paid for. It's got to be paid for somehow! (This is a stupid statement but it's obvious from countless postings on every pilot forum that most renters don't see that, and are looking for some amazing deal).

The driver behind the scheme has basically got two options:

1) Find a bunch of people, bang their heads together, and extract enough money from them to buy the plane and run it. This is how most groups run. This scheme is immune from BIK even if run as a ltd co. because all beneficiaries are owners. It doesn't have to make a profit, or even break even (although obviously it needs to break even cash-wise in the long run).

2) Set up a zero-equity scheme, which would usually be a limited company because you are doing pure rental and you really do want the liability limitation etc. You have to stick some dosh into it to start with (by way of a loan, or as paid up share capital) and you then rent the plane out to anybody suitably qualified. You can do what the well known Cirrus schemes do and sell blocks of time to which each renter then has access, but it is still really just rental; the main difference is that a renter who has paid a few k for a block is more likely to hang around! This kind of scheme is what HMRC don't like IF the ltd. co. officer(s) have access to the plane unless the business makes money; breaking even is not enough.

In case (2) it is obviously possible for the renters to buy sufficient blocks up front to fund the initial purchase of the plane. I don't know how this money would be treated in the company accounts; it can't be a loan because the buyer of the block can't get his money out again. Anyway, the renters are purchasing an entitlement to rent the plane for X hrs/year, but they never get to own any part of the plane. Based on the HMRC case I am familiar with, the officers of the company will get hit for BIK unless the business either makes a profit (and is set up from the start to make a profit, and this is demonstrable with a business plan etc) or the officers can't and don't fly.

Now, it's quite possible that my knowledge is based on just the 3 maverick tax inspectors who were backed by another maverick at head office and the whole thing was a scam, and they were hoping for a settlement without the scam being exposed by a General Commissioners hearing, and this is exactly what happened. HMRC do like to work that way, preferring informal settlements where the legality doesn't get properly tested, but I don't think that was the case here.

An LLP has, IIRC, got to be set up to make money but might be a good idea for case (2) since this has to make money anyway.

But it should be easy enough for the ltd co. to be owned by another person who isn't even a PPL...

[Mike Cross]

Twaddle factor still a bit high. You do not necessarily have to have your accounts audited, the law changed a year or two ago and my own company, which turns over circa 1.25 million hasn't published audited accounts since. HMRC website will no doubt have the info.

The idea that group members buy shares in the company and get voting rights ain't necessarly so either. If you're foolish enough to buy a timeshare does your cash give you shares and voting rights in the timeshare company?

Nor is the idea that a company is financed by its members true. If you look at any successful company you'll find that the nominal value of the shares (the money put up by the shareholders which they will lose if it all goes pear-shaped) is diddly squat compared with the value of the company (which is why if you want a 5p share in BT you'll need to stump up over 3 quid for it).

The truth of the matter is that if HMRC think that tax payable is being avoided they have the power to make your life extremely difficult. "Getting round BIK" is not an option.

Finally, "Catch 22" is that if HMRC feel that the financial structure has been set up purely for the business of avoiding tax and not for legitimate business reasons they have the ability to ignore it and assess the tax due as if the arrangement had not been entered into.

Mike

[IO540]

I don't disagree with any of the above, Mike. But it avoids dealing with the subject.

IMHO, the only sure way to avoid an attack for BIK is for there to not be any BIK. So, in a ltd co which owns the plane, and where some/all of the flyers are not shareholders in the company, none of the employees should have any access to the plane.

Setting this up isn't rocket science, for goodness sake.

[Mike Cross]

IO, we only differ in that I think your approach is unnecessarily severe.

I totally agree that the best answer is for there to be no BIK. Not being an employee or shareholder doesn't in itself stop you receiving BIK.

Consider this:-
I set up a Ltd Co to own the aircraft. The company has the required one Director and a Co Sec, neither of whom are me. My mate is the only shareholder and has one share with a nominal value of £1. Naturally the Co has no money so I lend it 40k, secured on the asssets of the Co. This is used to buy the a/c. It rents the aircraft to me at less than the market rate. Eventually it runs out of money and I exercise my rights under the loan agreement by forcing the sale of the assets and getting back say 20k of my original investment.

I was never a shareholder or an employee of the Co. None of the shareholders or employees flew the a/c. Did I get a BIK? Did I lose 20k that I can claim back against tax? Can HMRC come gunning for me? I'd be surprised if they didn't.

[robin]

Take the example of a No-Equity Group Limited Company operating Permit Aircraft. The owner of the aircraft is one of the Directors, and he/she is responsible for the maintenance and availability of the fleet.

He undertakes flight tests and/or occasional trips on group business using the aircraft, but either gets discounted rates or does not pay for his flying in lieu of payment for his services. He does, however, get Director's fees/expenses

Would that count as BIK?

[Mike Cross]

No-Equity Group Limited Company operating Permit Aircraft
Illegal under the ANO IIRC. You can't rent it out unless it is maintained to PT standards, which a Permit a/c cannot be.
Art 162 provides an exemption for group owned aircraft but includes:-
(2) An aircraft falls within this paragraph if it is owned:
(a) jointly by persons (each of whom is a natural person) who each hold not less than a 5% beneficial share and:
(i) the aircraft is registered in the names of all the joint owners; or
(ii) the aircraft is registered in the name or names of one or more of the joint
owners as trustee or trustees for all the joint owners and written notice has
been given to the CAA of the names of all the persons beneficially entitled
to a share in the aircraft; or
(b) by a company in the name of which the aircraft is registered and the registered shareholders of which (each of whom is a natural person) each hold not less than 5% of the shares in that company.
So no-equity is a no-no.

WRT to the wider question. The receipt of free or discounted flying in lieu of payment is EXACTLY what BIK is. If you are paid for your services, whether in cash or any other form of valuable consideration it's taxable.

On the other hand if the activity concerned is a necessary part of the legitimate business activity of the company it's not BIK.

Examples:-
You deliver the aircraft to the maintenance organisation - not BIK
You take your wife and kids to Le Touquet for lunch - BIK

This advice is worth what you paid for it.

Mike

[robin]

Interesting

I would guess that the last point is how the group would work


(2) An aircraft falls within this paragraph if it is owned:.....

(b) by a company in the name of which the aircraft is registered and the registered shareholders of which (each of whom is a natural person) each hold not less than 5% of the shares in that company.

A group with 20x £1 shares would fit that bill. But does this only apply to CofA types maintained to PT standards? or can you apply this to Permit A/c?

[Mike Cross]

OK
20 x £1 shares is fine but the Co has to own the a/c so where does the money come from? No commercial lender would be interested.
Yes you could lend the Ltd Co the money yourself but then you don't have control.
AFIK no problem with it being on a Permit.

[robin]

In the instance I'm thinking about, the Director bought 2 aircraft and set up a company to own and operate them and to bring together potential users, who are 5% share-holders.

So that would be OK then

[IO540]

There is too much confusion in this thread now.

Mike - if you lose £20k on a personal investment, you cannot offset it from your personal tax. You can do that only if you are a trader e.g. if you are an aircraft dealer or similar.

Anyway, HMRC couldn't care less if a business simply loses money. They would be bothered only if that loss was being used as group relief. Group relief is legal (if done correctly) but is highly provocative to HMRC.

You can set up a limited company, put some dosh into it (as a loan, share capital, whatever), run it for a bit, make a huge loss in the company, then dump it, and nobody will give a damn. This happens all the time; most small businesses fail pretty fast. But you can still get hit for BIK if you had personal use access to company assets - regardless of what happens in reality. You have a defence if the access was at market value etc but if HMRC smell a rat they will attack it on the grounds that the company was not initially set up to make money, and that disqualifies the "market value" defence, and they will have it easy because the company evidently has not made money! This is the tack they seem to be taking nowadays.

So, you have to either set it up to make money, or make sure that there is no personal access, or make sure that all pilots are shareholders.

It's quite difficult to set up an aircraft rental business so it makes money and can be demonstrated retrospectively that this was possible. It can be done, with the right aircraft, the right pilots, and enough utilisation. The problem is that most UK GA pilots don't have 2p to rub together, which narrows the options drastically. There are pilots with money, but they usually over-state their proposed annual hours by at least 10x. This is why most GA groups are either full-equity groups (where you go round with a cap in one hand and the last bill in the other and in effect force everybody to pay for whatever needs doing) or they are zero-equity groups where you sell time blocks and thus force people to put money where their mouth is up front.

The remaining option is a straight flying school type operation, and they usually rent out planes that are used for training. They get the utilisation through the training activity.

Take the example of a No-Equity Group Limited Company operating Permit Aircraft. The owner of the aircraft is one of the Directors,

The above is a contradiction. Either the company owns the plane, or some person owns the plane and rents it to the company.

[robin]

IO540

>>>Take the example of a No-Equity Group Limited Company operating Permit Aircraft. The owner of the aircraft is one of the Directors,

The above is a contradiction. Either the company owns the plane, or some person owns the plane and rents it to the company.<<<

Of course you are right. Only there are some people who are taking this approach to the limit, and, arguably, beyond.

In the case of a friend's group, the Directors act as de facto owners without consulting the other 'shareholders' and are ensuring minimal profits by large Directors fees and expenses.

There is also no means of voting the Directors off.

[IO540]

Robin

If I offered you a 49% shareholding in my business, in return for an investment of £1,000,000 you would be well advised to leg it, and the reason is what you wrote ;)

Minority shareholders can always be screwed. You never give a majority share to anybody unless you are happy for them to have total control.

Directors can do what they like, and only a shareholder majority can overrride them.

Minority shareholders have essentially no rights. They can sue if the company is run in a manner detrimental to their interests, but who wants to bother?

A limited company needs two people (min): a director and a company secretary. There is an argument as to whether one can be an unpaid Co Secy without becoming an employee (and thus avoid BIK if having access to the plane) and I don't know the answer to this one. A director certainly is an employee even if unpaid.

Somebody lending money to a limited company, or owning shares in it, does not become subject to BIK, AIUI. Lending money (under a proper loan agreement) should be OK because it does not entitle the lender to any control and he cannot be accused of being a shadow director. Owning shares in the company is something else. Messing about it its affairs (and leaving evidence of having done so) can make you into a shadow director. But this is a grey area and I would get proper advice.

I stick to my view that a "zero equity group" limited company needs to have non-flying officers, or it better make money.

Lots of people have done private deals with their inspector, and they don't post them on here. Lots of people also got done, and they don't post them on here either. I am happy to write about my experiences in the hope that it helps somebody, but I would not be doing it in the absence of reasonable anonymity. HMRC are certain to be reading this stuff. The CAA most certainly do, daily.

[rateone]

Can't help thinking that we're getting a little esoteric. Oxeagle are you wanting to set up a group with a bunch of mates or do you have delusions of competing with NetJets? The posts here are enough to scare anyone off.

Mr Cross, I don't believe that the "twaddle factor" is high. I agree with your point re audited accounts, but I still stand by my other points.

Nor is the idea that a company is financed by its members true.
Most companies gain their seed funding from either a loan (debt) or from issuing shares. You note in a later post that "no commercial lender would be interested", so we have to resort to potential group members putting up the funds to buy the aircraft plus set-up costs. This would be the initial capital for the company. I would want this to be in equal shares with voting rights because then there is no issue with majority share holdings. One director and one Co Sec each with a similar percentage as the other shareholders. All shareholders pay at the same rate for the aircraft - no BIK

The timeshare analogy would work if we look at the Flying Group as a no equity limited company - In which case a "rich uncle" has put up the funds. Users pay for the right to use blocks of time on the aircraft. There is no share ownership in the company. Big advantage is you're not limited to twenty owners. Downside, insurance is higher (Rental rather the Private/Pleasure), capital provider requires return on capital, directors - paid roles, discounted use of a/c unless on legitimate company business BIG BIK - Hmm Conrad Black springs to mind!

Nor is the idea that a company is financed by its members true. If you look at any successful company you'll find that the nominal value of the shares (the money put up by the shareholders which they will lose if it all goes pear-shaped) is diddly squat compared with the value of the company (which is why if you want a 5p share in BT you'll need to stump up over 3 quid for it).


The reason for this is because the market values company stock as a function of current assets, profitability, and view of future performance (among other things). I can't see any flying groups (Limited company or not) outperforming the Footsie, so your argument doesn't wash. The value of a flying group structure as a limited company is in the assets (the a/c plus cash in the bank). If I were buying into such a group I wouldn't want to pay more than a proportional share of that amount. In reality most group shares are priced on a notional value of the aircraft. Some groups even reset this annually.

Bottom line. Lots of ways to part fur from the feline but I still come back to my original point. If it's you and bunch of mates - why the Limited company approach? What's wrong with a well drafted and legally binding Syndicate Agreement. It works well in our group.

[michaelthewannabe]

I don't have the answers myself, but maybe these guys do:

http://www.aircraftgrouping.com/no_equity_index.htm

Best of luck, OxEagle - and if all goes to plan, I may be interested a year or so from now!

mtw