VAT Chaos looms for AOC holders
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VAT Chaos looms for AOC holders
It had been thought that, following the change of VAT law in the UK in relation to the supply of aircraft, that AOC holders would be regarded as 'airlines'. However, it now seems that HMRC in the UK is interpreting the rules in a way that was not expected.
For the supply of an aircraft to be zero-rated it has to be a 'qualifying' aircraft. This means that it must be an aircraft used by an 'airline' operating for reward chiefly on international routes. An airline is defined in the law as any undertaking providing services for the carriage by air of passengers or cargo (or both). see the interesting and informative article
If an aircraft is a qualifying aircraft, the supply of it (sale, lease or hire) is zero-rated and supplies of such things as handling and maintenance etc are also zero-rated. If the aircraft is not a qualifying aircraft, then VAT at 20% is due in relation to the supply of the aircraft itself and the handling / maintenance costs etc.
In cases where aircraft are 'managed' by an AOC holder, it was initially thought that provided the AOC holder met the definition of an airline operating for reward chiefly on international routes, the supply of ther aircraft by the owner to the AOC holder would qualify for zero-rating. It seems however that HMRC has amended its Notice 744C (see paragraph 12) which now states that where a Manager (AOC holder) uses an aircraft partly to fly third party charterers but also partly to fly the owner, the aircraft cannot qualify as a zero-rated 'qualifying' aircraft. What is more, I understand that HMRC are challenging AOC holders which manage aircraft they don't own. They seem to be suggesting that they are not an 'airline' as defined, but are simply aircraft 'managers'. As such, it seems that very few Biz Jets in the UK could ever be regarded as 'qualifying' aircraft
It seems to me that whether or not the AOC holder is an airline (as defined) is a question of fact which will be evidenced by the contractual documentation. If the AOC holder acts as principal when it provides 'Public Transport' under its AOC, it would seem to me to be straining the truth to say that they were not an undertaking providing services for the carriage of passengers by air. Come on HMRC, you need to get this right?
Anybody else having any difficulties with the new VAT rules?
For the supply of an aircraft to be zero-rated it has to be a 'qualifying' aircraft. This means that it must be an aircraft used by an 'airline' operating for reward chiefly on international routes. An airline is defined in the law as any undertaking providing services for the carriage by air of passengers or cargo (or both). see the interesting and informative article
If an aircraft is a qualifying aircraft, the supply of it (sale, lease or hire) is zero-rated and supplies of such things as handling and maintenance etc are also zero-rated. If the aircraft is not a qualifying aircraft, then VAT at 20% is due in relation to the supply of the aircraft itself and the handling / maintenance costs etc.
In cases where aircraft are 'managed' by an AOC holder, it was initially thought that provided the AOC holder met the definition of an airline operating for reward chiefly on international routes, the supply of ther aircraft by the owner to the AOC holder would qualify for zero-rating. It seems however that HMRC has amended its Notice 744C (see paragraph 12) which now states that where a Manager (AOC holder) uses an aircraft partly to fly third party charterers but also partly to fly the owner, the aircraft cannot qualify as a zero-rated 'qualifying' aircraft. What is more, I understand that HMRC are challenging AOC holders which manage aircraft they don't own. They seem to be suggesting that they are not an 'airline' as defined, but are simply aircraft 'managers'. As such, it seems that very few Biz Jets in the UK could ever be regarded as 'qualifying' aircraft
It seems to me that whether or not the AOC holder is an airline (as defined) is a question of fact which will be evidenced by the contractual documentation. If the AOC holder acts as principal when it provides 'Public Transport' under its AOC, it would seem to me to be straining the truth to say that they were not an undertaking providing services for the carriage of passengers by air. Come on HMRC, you need to get this right?
Anybody else having any difficulties with the new VAT rules?
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If the UK change their law as it seems they hope to do, then I am sure the CAA register will diminish as people find more accommodating European registers on which to place their aircraft.
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Sadly, my understanding is that the problem is not the "G" on the tail. It is the location of the owner (in the UK) that determines the VAT liability.
Try pitching up at Nice in a Cayman reg aircraft. If the owner is British (or indeed any other EC State), the powers-that-be will still take an interest in the aircraft's VAT status......
Try pitching up at Nice in a Cayman reg aircraft. If the owner is British (or indeed any other EC State), the powers-that-be will still take an interest in the aircraft's VAT status......
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This is yet another of these mysterious VAT posts. Am I missing something, or am I the only person who knows how VAT works?
Businesses don't pay VAT. If you are in the Air Transport business, whether as a lessor, an operator, a charter operator, an AOC holder, or pretty much anything where the purpose of the exercise is to make money either directly or indirectly from the aircraft, you don't pay VAT. Granted, it is a tedious process to shuffle the VAT paperwork, and as a previous thread has discussed, there can sometimes be a cashflow implication, but that's all.
As a result - apart from the tedium mentioned - I suspect that what you describe as "VAT Chaos" is a complete non-event.
VAT is a tax on end consumers. You can pass a product (or service) down the food chain through as many businesses as you like, each adding their own little bit of value, and although they all have to "account" for the tax - so as to arrive at the end "value added" - it doesn't cost any of them a penny. Eventually a (non VAT registered) end consumer gets the invoice for the ultimate product or service and pays the VAT.
Businesses don't pay VAT. If you are in the Air Transport business, whether as a lessor, an operator, a charter operator, an AOC holder, or pretty much anything where the purpose of the exercise is to make money either directly or indirectly from the aircraft, you don't pay VAT. Granted, it is a tedious process to shuffle the VAT paperwork, and as a previous thread has discussed, there can sometimes be a cashflow implication, but that's all.
As a result - apart from the tedium mentioned - I suspect that what you describe as "VAT Chaos" is a complete non-event.
VAT is a tax on end consumers. You can pass a product (or service) down the food chain through as many businesses as you like, each adding their own little bit of value, and although they all have to "account" for the tax - so as to arrive at the end "value added" - it doesn't cost any of them a penny. Eventually a (non VAT registered) end consumer gets the invoice for the ultimate product or service and pays the VAT.
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Yes, CJDriver, you are missing something.
VAT is still payable by all businesses. They can claim it back at the end of the quarter but it still has to be paid. Since most businesses have real profit margins of less than 20% this can be very bad for the cashflow.
In the case of aircraft (or any large, capital equipment), paying the VAT and waiting to reclaim it can be next to impossible. Particularly where any sort of finance is involved.......
To really complicate the issue the EU have now introduced this ridiculous way of determining the VAT status of an aircraft based on what it does/will do on a day-to-day basis. It paves the way for stupid arguments between officials and businesses, wasting time and money. It does not allow for the fluctuations in business, or changes of direction, that are bound to happen - especially in the bad times when people are flexible in their approach to what they do, if they want to eat or pay the wages bill.
They could implement the American way of doing things, whereby a trading business can claim exemption from sales tax, but those that govern us are well practiced in the arts of fiddling expenses and taxes - they assume that all business will do the same!
VAT is still payable by all businesses. They can claim it back at the end of the quarter but it still has to be paid. Since most businesses have real profit margins of less than 20% this can be very bad for the cashflow.
In the case of aircraft (or any large, capital equipment), paying the VAT and waiting to reclaim it can be next to impossible. Particularly where any sort of finance is involved.......
To really complicate the issue the EU have now introduced this ridiculous way of determining the VAT status of an aircraft based on what it does/will do on a day-to-day basis. It paves the way for stupid arguments between officials and businesses, wasting time and money. It does not allow for the fluctuations in business, or changes of direction, that are bound to happen - especially in the bad times when people are flexible in their approach to what they do, if they want to eat or pay the wages bill.
They could implement the American way of doing things, whereby a trading business can claim exemption from sales tax, but those that govern us are well practiced in the arts of fiddling expenses and taxes - they assume that all business will do the same!
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Chaos and VAT
I think Chaos summed it up nicely.
I agree that if you are 'in business' then your VAT position ought to be neutral (indeed, the EU VAT system is predicated on the principle that it is a tax to be borne only by the final consumer). However, it is also a self assessing system of taxation (that is, the supplier of the goods or the services determines for himself whether a particular supply is within or outside the scope of UK VAT and if within, at what VAT rate). This means that even though the fiscal VAT position of a business should be neutral, if the supplier makes a mistake (because the rules are so complicated he can't understand them), he can be subject to substantial VAT penalties (the starting point is 30% of the tax that might have been lost for a simple 'careless' error up to 100% for deliberate and concealed errors). Interest is also payable on any tax that is paid late.
Imagine supplying an aircraft (let's say a Citation Excel) and, because you thought it was a qualifying aircraft you didn't charge the customer any VAT. HMRC turn up a few years later and determine that the aircraft did not qualify and they dump a VAT bill on you for 20% of the value of the aircraft (which you might, or might not get back from your customer) Let's say that's £1M. Then add the penalty (let's say that you get HMRC to mitigate the penalty to 15% as opposed to 30% (it's possible to mitigate the penalty down to zero% but not likely) that's another £150K. Oh, and then there's the interest let's say £1M * 3% for two years = another £60K.
You see that it is not just a question of the VAT being paid and claimed back. Even if you could get the customer to pay the extra £1M (if I were the customer I would not be very happy and might even consider taking my business elsewhere) Can you really afford to pay the penalties and interest?
Miss T Wood
I agree that if you are 'in business' then your VAT position ought to be neutral (indeed, the EU VAT system is predicated on the principle that it is a tax to be borne only by the final consumer). However, it is also a self assessing system of taxation (that is, the supplier of the goods or the services determines for himself whether a particular supply is within or outside the scope of UK VAT and if within, at what VAT rate). This means that even though the fiscal VAT position of a business should be neutral, if the supplier makes a mistake (because the rules are so complicated he can't understand them), he can be subject to substantial VAT penalties (the starting point is 30% of the tax that might have been lost for a simple 'careless' error up to 100% for deliberate and concealed errors). Interest is also payable on any tax that is paid late.
Imagine supplying an aircraft (let's say a Citation Excel) and, because you thought it was a qualifying aircraft you didn't charge the customer any VAT. HMRC turn up a few years later and determine that the aircraft did not qualify and they dump a VAT bill on you for 20% of the value of the aircraft (which you might, or might not get back from your customer) Let's say that's £1M. Then add the penalty (let's say that you get HMRC to mitigate the penalty to 15% as opposed to 30% (it's possible to mitigate the penalty down to zero% but not likely) that's another £150K. Oh, and then there's the interest let's say £1M * 3% for two years = another £60K.
You see that it is not just a question of the VAT being paid and claimed back. Even if you could get the customer to pay the extra £1M (if I were the customer I would not be very happy and might even consider taking my business elsewhere) Can you really afford to pay the penalties and interest?
Miss T Wood
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Flyingfemme, no, I did not miss out on the cashflow implication - I mentioned it in my post.
Anyone who is buying a large business jet is already in the big leagues. They are buying an asset for many millions of dollars. Their running cost is perhaps also measured in millions (or chunky fractions of) a year, depending on hours and staff cover.
I realise that for private individuals, these may feel like scary numbers, but I can assure you that to someone who has paid 10 million for a jet, the 2 million short term VAT exposure is just part of doing the transaction.
Conversely, if you can't afford to cover the VAT, and can't persuade your bank to give you a bridging loan for up to 90 days - which is the longest period you need to wait before getting it back - then you can't afford to buy and operate a business jet.
Anyone actually in the business understands this already, which is why these detailed changes to tax treatment are a big non-event to most operators.
Finally, for the discussion about whether someone might "get it wrong" and thus be liable for an unexpected bill - that is true in any business, and aviation is not special. That's why we use lawyers and accountants.
Anyone who is buying a large business jet is already in the big leagues. They are buying an asset for many millions of dollars. Their running cost is perhaps also measured in millions (or chunky fractions of) a year, depending on hours and staff cover.
I realise that for private individuals, these may feel like scary numbers, but I can assure you that to someone who has paid 10 million for a jet, the 2 million short term VAT exposure is just part of doing the transaction.
Conversely, if you can't afford to cover the VAT, and can't persuade your bank to give you a bridging loan for up to 90 days - which is the longest period you need to wait before getting it back - then you can't afford to buy and operate a business jet.
Anyone actually in the business understands this already, which is why these detailed changes to tax treatment are a big non-event to most operators.
Finally, for the discussion about whether someone might "get it wrong" and thus be liable for an unexpected bill - that is true in any business, and aviation is not special. That's why we use lawyers and accountants.
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Not everyone who buys an aircraft is an impoverished Cherokee driver or a bloated multinational. There are lots of shades in between.....many borrow to buy their "tools and equipment", which can include an aircraft. These companies (and individuals) generate jobs and income - which should be considered a good thing.
The implications of an interpretation of the rules which differs from that of your local customs and excise officer is very scary - given that most businesses do not have a net profit margin as large as their local VAT rate.
Business planning should not have to depend upon flakey interpretations of the rule.
The implications of an interpretation of the rules which differs from that of your local customs and excise officer is very scary - given that most businesses do not have a net profit margin as large as their local VAT rate.
Business planning should not have to depend upon flakey interpretations of the rule.
