Claiming back VAT on aircraft purchase

[fltcom]

Can anyone reccommend a good source of info on the legal aspects of forming a company to purchase an aircraft with a view to claiming back the VAT? Can it be done? or is it a minefeild?

Flt...

[S-Works]

Unless you are a legitimate aviation busines forget it. By aviation I mean genuine AOC or flying school operator.

Not only are you unlikely to get away with it, you are also opening yourself up to a one of the regular "envy" visits from HMCR.

Have a search aorund for the guy who bought a new DA40 TDI and had to sell it after a visit from the revenue guys. Running an avaiation group will not cut the mustard.

If you are importing new (or used) to Europe you could come in via Denmark and PAY 0% VAT.

[MikeJ]

Bose, not sure you are quite right on this. Yes, you cannot form a company and claim VAT if its for the purposes of enabling your personal recreational flying.
But I think that a non-aviation business can operate an aircraft for the purpose of transportation of their staff (which may include the pilot flying), or goods, on their business. I'm sure very many do, including corporate jets!
I operated an R22 for several years for the sole purpose of visiting clients on my non-aviation business, and I'm sure that my reclaim of VAT, as well as the operating costs against company income, was perfectly legal.
I never had a HM revenue query on this, although it was transparent in filed accounts, with an aircraft explicitly in the balance sheet, and depreciation of it against profits.
Mike.

[flybymike]

The group I am a member of, formed a limited company in 1993 for the specific purpose of claiming back VAT on the initial aircraft purchase and also to limit group members personal liability in the event of accident etc. The arrangement also has the benefit that the group are able to reclaim VAT on all fuel purchases , repairs, maintenance and all other vatable expenditure on the aircraft . The disadvantage of course is needing to charge VAT on group invoices, but assuming that the group is non profit making, then it is an entirely revenue neutral operation. In 14 years of current limited Vat registered company operation ( and 5 years in a separate company before that, also set up for the same reasons ) we have had 5 changes of aircraft reclaiming VAT where it was applicable on the aircraft purchase and only ever had one ( entirely innocuous) visit from the Vatman. Of course, when you come to sell the aircraft again, you need to charge Vat on the sale price.
Given that many groups like ours seek limited liability protection, then VAT registration is entirely feasible and desirable and I don't see any problem with the concept at all.
Mike

[IO540]

If you buy a plane for a company, and it's used 100% for business travel, there is no problem at all.

If you buy a plane for a company, and it is used less than 100% for business travel (the rest being private use by the proprietor) then

- Customs tend to be happy with that, so long as the private use is fully reimbursed to the company, plus VAT of course

- Revenue will be interested in the Benefit in Kind issue, but I am not going to type reams on this since I've already done that, and as bose-x suggests there is a LOT of "envy" investigations going on today.

A purchase for a zero-equity group (i.e. a purchase by a company, typically, with the objective to rent it out to a number of people) is possible to get by C&E but the Revenue really hate it unless they see nice cheques for corp. tax - which they won't because the capital allowances alone will wipe out taxable profits for years to come. You can do this if every pilot is a part owner of the company, but that isn't a zero equity group.

For an equity group, there isn't any point in VAT registering because while you can potentially claim back VAT, you have to invoice everybody with VAT so there is a lot of paperwork and exactly zero gain.

So, for any significant private use, I would strongly suggest purchasing via Denmark and you can then forget the whole VAT reclaim business.

There is a considerable variation around what people get away with, due to varying practices around tax offices around the UK, and also due to very different approaches to the subject by the Revenue and Customs (even though the two are supposedly together now as HMRC). So it's no suprise that people say they've had no problems.

The Revenue are absolute swines and bastards these days. Gone is the relative professionalism of the 1970s and 1980s. The inspectors are on a bonus scheme for promotion and don't earn all that much either. They know they can randomly hit any business involving boats, planes, or horses and if they run the enquiry for a year or more the proprietor is sure to give them 4-5 figures to get rid of them, and this is exactly what I did last year. One inspector can hit 10-20 companies a year in this way, and he gets good points for that. There is no justice unless you go to General Commissioners but you won't get a tax barrister for under £10k.

[Fuji Abound]

Bose - I cannot agree on this occasion.

The Customs may well "target" "personal" aviation companies but the usual reason is the high level of evasion amoung such companies.

The routes set out above are entirely legitimate and if the aircraft is used for business in whole or part are tax efficient. I have a number of clients who do just this.

Fltcom - you may also wish to consider the option of importing the aircraft through a service company in Europe and avoiding paying the VAT if this should be an option.

[IO540]

I would never disagree with Fuji who I know is a specialist on this, whereas I am a mere victim, but would like to point out that the Revenue will hit what they ritually regard as a dodgy business and it is then up to the proprietor to prove his innocence.

This is expensive, and even dealing with a long enquiry (the Revenue love nothing more than a long dreary enquiry) will cost an absolute minimum of 4 digits and easily 5 digits.

The question is whether it's worth doing.

On a 1970s spamcan, no. On a £300k IFR tourer or above, yes, but I would do the Denmark route, and keep Customs out of the whole setup. There is still a nice fat fee to the Danish lawyer who clearly needs substantial compensation for injury as a result of falling over as he laughs all the way to his bank, but the saving is well worth it.

In comparison, my personal experience of C&E has been nothing but professional. This I find curious since they have much greater powers than the Revenue.

[fltcom]

Thanks fopr the replies. However the aircraft in question is already in the UK and being sold by a company that have previously reclaimed the VAT. They are required to sell it and charge VAT to the new buyer. The Denmark route wouldn't work, un;ess I am missing something.

Flt...

[flybymike]

IO540 makes the point that there is no point in registering for VAT, since any reclaim on purchases is nullified by the need to charge it out on sales invoices to group members, and indeed as I originally stated, the exercise is entirely revenue neutral from that point of view. However it should be remembered that you are initially effectively purchasing the aircraft at a 17 and a 1/2 per cent discount which does not have to be repaid until the aircraft is resold. This is effectively an interest free loan of many thousands of pounds from the government for the duration of ownership of the aircraft, and there are not many loans of that sort around, least of all from HMG.
Careful selection of group invoice dates relative to VAT return dates can also result in substantial VAT reclaims on purchases whilst at the same time delaying VAT payments to HMRC. Again a perfectly legitimate interest free loan from HMG.

[IO540]

Fltcom - I think it's too late for you. I am sending you a PM with a contact who can give you expert VAT advice though.

The other thing about VAT is that C&E run all returns through a program that looks for patterns and if they see something odd they will come round and go through the books. A constant reclaim of substantial amounts of VAT will trigger this, because there are very few businesses who can be constantly reclaiming VAT without at the same time being cash negative (and thus going bust).

When I put in the reclaim for the aircraft purchase, I got an immediate phone call from C&E who wanted a written business plan showing it was a real aircraft rental business, and while he was not concerned about private use (this is an area where the Revenue and C&E differ) he was most interested that everybody gets invoiced at the same (non preferential) rate and gets invoiced with VAT.

I know many others have run ltd co groups with VAT registration and been reclaiming VAT every quarter for the last 10 years - all I can say this is not my experience and their VAT office is probably not as organised as some.

But anyway as mentioned above it's just a cash flow postponement and with today's interest rates I wouldn't bother. There is a significant time saving in not having to prepare detailed VAT records - unless you run the group finances in some accounting software - I used to use Sage.

The used plane market is in two parts really: the "VAT paid" and the "plus VAT". The latter are of more interest to corporate buyers.

[A and C]

The very moment that I put in the reclaim for the VAT on the three aircraft that my business owns the and the VAT inspector stopped the reclaim payment an requested to visit the business.

Once the inspector had established that the business was "real" and not a front for cheap flying the repayment of the VAT was swift.

It is clear that if you think that registering for VAT is the route to cheap flying the VAT people are on to it ! I do know of some people who are "trading" to save themselfs the VAT but these have guys have been established a long time and got in before the VAT got wise to the trick and I guess the VAT can't do much about it.

[bookworm]

The arrangement also has the benefit that the group are able to reclaim VAT on all fuel purchases , repairs, maintenance and all other vatable expenditure on the aircraft . The disadvantage of course is needing to charge VAT on group invoices, but assuming that the group is non profit making, then it is an entirely revenue neutral operation.

It's usually slightly worse than revenue-neutral as no VAT is chargeable on insurance and it's often not worth reclaiming smallish amounts of VAT on e.g. fuel bought in other EU states.

The advantages are in capital outlay, and if your hirers are themselves able to reclaim VAT.

[stickandrudderman]

Why would you want to avoind paying the VAT in the first place?
You must know that our government needs this money in order to be able to provide homes, cars & lifestyles to those who haven't earned it!:E

[nouseforaname]

StickandRudder man keep your opinion of paying VAT to yourself. A lot of people in this forum work very hard towards having their dream of owning a light aircraft. We are ALL taxed up to the eyeballs as it is, so if someone can avoid paying VAT on his dreammachine best of luck to him/her.

Back to the point.....i've looked into this with some specialist accountants and found the best route was the Denmark 'zero vat' process. It might seem a bit dodgy but I know people that have imported Cessna Citations on this basis, can you imagine 17.5% of $5-$6m!!

[IO540]

Everything that is not prohibited by law is permitted and is 100% legal.

The Denmark route is 100% legal. UK C&E don't like it but they can't stop it - it is for Denmark to have chosen this particular interpretation of the EU VAT directive and once they have issued a certificate of free circulation then that's as far as it goes.

But it has to be done correctly. For example, you can't fly the plane around the UK (at all) prior to it going to Denmark.

A&C - I had the same experience, and had no problems after describing the business and supplying the business plan. But in retrospect it was barely worth doing, for the hassle. However, when I did all this, the Denmark route was not a well known option.

[mm_flynn]

I believe it is possible to have an offshore interest purchase a non-VAT aircraft currently in the EU for export. Then for you can buy it and import it via Denmark. However, as IO says, the slightest slip up and C&E will be all over you like a rash (:{). You want to have clear professional advice, that you have paid for and can claim against the advisor's PI insurance, not the advice we are all providing on a anonymous bulletin board.

[stickandrudderman]

"StickandRudder man keep your opinion of paying VAT to yourself. A lot of people in this forum work very hard towards having their dream of owning a light aircraft. We are ALL taxed up to the eyeballs as it is, so if someone can avoid paying VAT on his dreammachine best of luck to him/her."

Some people have no sense of humour!:D

[flybymike]

Another example where an "irony" smilie would have come in useful.....

[360BakTrak]

:ugh::ugh::ugh::ugh:

[bladewashout]

I had no problem reclaiming the VAT on a new R22, starting a brand new company to own the asset, but they did expect to see copies of all the documentation for the purchase and a copy of a lease contract I had agreed with a flying school to burn hours on it. Repayment was swift thereafter. I'm hoping to sell it and buy a different one using the same company, so the trading history of the same company should help.

It is very sensible to make a lease contract with someone around the time of purchase and arrange to burn some hours in the early months to make the VAT return numbers look good for a couple of quarters, including VAT on all your own flying (which applies indefinitely). If things don't work out thereafter (business is business), HMRC will find it harder to ask for their VAT back (and believe me they can do that...!).

The beauty is if you are in a position get your own companies to invoice your helicopter company for use of the machine, because that is when flying becomes cheap. All you need are links to several small companies who can make this possible and numerous good reasons to fly on business, then you're laughing.

However, it'll never be as cheap as renting from someone else - the old saying applies, "If it flies, floats or f***s, its cheaper to rent"!

BW

[IO540]

but they did expect to see copies of all the documentation for the purchase and a copy of a lease contract I had agreed with a flying school to burn hours on it

That should do for C&E but IME it won't do for the Revenue these days because for them the arrangement is principally to provide you with cheaper private flying, and isn't a "real business" or an "adventure in trade" as they like to call it. This enables them to wash their hands of their standard BIK guidance (http://www.hmrc.gov.uk/manuals/senew/SE21004.htm)and they then go after you for BIK.

The beauty is if you are in a position get your own companies to invoice your helicopter company for use of the machine

You can do the same if you own the plane personally. Let's say you spent £20k a year flying, and 25% of that was demonstrably on business, you can claim £5k/year from your business as an expense. This is legal with HMRC, though not a lot of people know about it, thinking they can claim back only 40p or 60p or whatever per mile.... (Whether this is legal under the UK ANO in a G-reg is another matter which we did to death here a while ago).

[bladewashout]

To be fair, we did flog this particular R22 to death, I flew about 100 hours, the a/c did 500 hours in total in 1 year. It looked like a real business because it was trying to be!

With regard to the revenue we charged personal flying at the same rate as we charged the flying school, so there is no benefit in kind, and we always charged VAT. Rent in R22 land is pretty much set - you can up your price but people will just rent more hours from someone else - there's aways some new-to-the-business owner (like I was) who hasn't figured out that he's on to a loser from the start and agrees a rent that will never make a profit! The only freebies came in the form of "aircraft accessories" charged to the company.

The problem is, when you do it properly to avoid revenue/Customs risks, it's ultimately more expensive than renting, but you do get to keep it in your garden for convenience and not worry about a daunting brown envelope dropping through the door.

I reckon it ended up costing me at least £50/hr more to own the R22 than to rent 100 hrs, which is a staggering amount considering it flew 500 hrs in the year. Most of that came from depreciation at point of sale of the a/c after a year: if I'd achieved 5k more on the sale price, we'd have been break even. Sale price is critical.

My view now is to decide an amount I will spend per year if I want to rent, and a bigger amount if I want to own, based on some leaseback to keep HMRC happy but not to an extent where it compromises my enjoyment of the a/c.

Trying to own and make a profit just messes up the fun of ownership. Once you come to terms with the fact that ownership is probably going to cost you more than renting (particularly rotary), you can set aside your money, forget about the budget & enjoy it.

BW

[nouseforaname]

appologies stick and rudder man......

[IO540]

we charged personal flying at the same rate as we charged the flying school, so there is no benefit in kind

That is a standard defence but IME the Revenue push it aside on the assertion that the business is not set up to make money.

To top the insult, they can and will charge you BIK (which arises purely as a result of the plane being corporate owned) even though they have decided the business was not a real business. This is a real perversion of justice but is valid.

In your case, you did indeed flog the heli to death and that is probably the only situation in which one will have an easy ride with the b*stards in the Revenue. The same applies to fixed wing; the thing has to be practically wrecked to make a profitable business, and this is why most self fly hire fleets are in such a state.

To do it with something decent is going to be much harder, IMV. The kind of "quality pilots" that you need to fly something nice (and complex) are few and far between.

Renting an IFR tourer is harder still because the most obvious renter candidates (airline pilots) don't want to fly IFR; they are invariably sick to death of IFR and want to fly rag and tube types. The vast majority of PPLs would need a dozen check flights just to cover the basics, and then you are still left with what the hell happens if he gets stuck in IMC - who will recover the plane from some dump 300nm away after he's taken a cheap flight back home. There is visible competition from the various Cirrus groups that sell blocks of hours and these will mop up people who have any cash.

Incidentally, I came across one more requirement: the plane has to be parked at a public airfield so renters can just turn up (having booked it via a booking site) and jump in. I would be wary about keeping a heli in one's garden and running it as a rental business, unless people can literally just drop in and jump in.

All these things, and much more, were banged around over a 2-year enquiry and the Revenue were not going to go away unless they picked up a 5-digit cheque so they could move on and hit their next target.

[stickandrudderman]

appologies stick and rudder man......

Accepted!:ok:

[niknak]

Don't forget that although you can voluntarly register for VAT at any time, to reclaim it, the company has to have an annual turnover of £65K or more and there are specific restrictions as what you can reclaim relief on.
Having formed the company, then purchased the aircraft you can then reclaim the VAT as long as you can prove that it is a legitimate part of the company's operations, any hint of "personal use" will preclude any reclaim.
You can only do that within 12 months of the purchase of the aircraft and within the same tax year that your turnover exceeds £65K.
Thereafter, your company has to meet the turnover requirements to reclaim the VAT on any eligible expense.
Take advice from a suitably qualified source, balance the costs of employing a qualified accountant and what you will actually get back.
Get it right and you'll be OK, make a "mistake" and the Revenue will be on your doorstep.

[IO540]

I think there are several errors in the above, e.g. about having to have turnover above 65k to reclaim VAT...............

The good advice would be to see a good accountant, but make sure he knows about this kind of thing and is not just a street corner type that does PAYE for old ladies.

[lartsa]

Beware of the benefit in kind rules /depreciation

we imported a 1.4 millon dollar helicopter the vat was reclaimed no problem but the revenue wanted nearly 100,000 per year benefit in kind as they said it was available to me 24 hrs per day and 7 days per week also the tax write off is only 6% as it is classed as a long life asset
they also wanted to go back 3 years and the investigation lasted 3 years

i managed to make a suitable aggreement with them but it was 3 years of worry and £1000,s in accountant /legal costs

i also owned personally a small heli but that made little difference they said they would allow the hours i flew in my private heli to be deducted from the 24 hour 7 days per week BIK

[IO540]

Indeed.

Incidentally, long life assets are those with depreciation of 5% or less, IIRC. This is a catch 22 though, because if you argue the asset is short life (and want to write it down say 25% a year) then you screw your business plan because the aircraft will need replacing so much sooner. If you argue the aircraft will last a long time, then you can't support 25% capital allowances, and this is relevant if the whole project is within a larger corporate structure.

AFAIK the only reasonably safe way to avoid BIK is to

a) for the limited company proprietor(s) to not be able to fly at all (i.e. not have a PPL, etc), or

b) everybody who flies to be a shareholder

The above came out of the investigation which I am aware of.

One obvious question is how come the Revenue does not bust every employee of a company that owns a jet, for BIK? Answer: the employee has no access, and this could even be in his contract. The problem is that a Director can in principle get access because of his authority (to boss people around) so his access needs to be explicitly controlled. This came up a couple of years ago and the major accountancy firms sent circulars to their clients at the time on how to handle this... a controlled-access booking method (e.g. a website) was the 1st line of defence, and a ban in the contract of employment was next, IIRC.

Unfortunately, the incentive for corporate aircraft ownership is going to increase in the future, because the bottom has fallen out of the used aircraft market. A £300k tourer bought 5 years ago might fetch £120k now if in mint condition; less if composite (e.g. a Cirrus). So the real depreciation is huge; getting more like flash cars. It's obvious worth trying to use this loss somewhere, but it's very hard to reconcile this with the case where there is any private usage by the company officers.