Legalities behind selling block-hours

[Blue Albatross]

Hi All,

I'm not looking for a full-on legal answer here (just to put you all at ease), rather a devils advocate type advice on the following topic.

I have a French registered aircraft based outside of France, but within an EU member state (i.e. The Netherlands). I get to fly her about 5-6 hours a month during the Spring/Summer season, and 1-2 if I'm lucky during Autumn/Winter.

As a way of utilising her more and thus contributing to the costs of the annual, and maybe some minor upgrades here and there, I was thinking of selling block hours (say 15 or 20 hours) at a fixed price. The person's interested would have to arrange their own insurance and be checked out by me in the plane before being allowed to take her up.

My questions though are around the validity and legality of doing this. I'm conscious that maybe I might not have the right certification of use of the plane (private versus public) and I know that my PPL privileges prohibit me from making a profit from flying, but as an airplane owner, how does this work as I would not be running an operation with a view to owning an AOC and simply want to cover the running costs of the plane, rather than make a profit on her. Do I need to register this kind of activity with the CAA or equivilant either here or in France?

I would really appreciate your feedback, experience, advice particularly if you've done this yourself and have come up against the bureaucracy I might have to face with the Dutch authorities.

Also, is it perhaps wise/unwise to created some for of administration (company, group etc) to manage and track the costs under? Bearing in mind that my intention is not to sell "shares" in the aircraft, rather just the right to flying hours at a fixed wet price.

Thanks in advance

[IO540]

This could be hugely complicated.

Presumably you fly on a French PPL. Then, with an F-reg plane, what you can and cannot do is as per DGAC rules, but the owner of the local airspace can have regs which can be additionally restrictive; for example owners of N-reg planes flying in UK airspace cannot do some ops which one could do in US airspace (single engine public transport being an obvious one).

In fact you don't even say you fly in UK airspace at all. So you need to find out Netherlands airspace regs.

If you asked re a G-reg based in UK and flown on a UK PPL then you could get some better answers here.

There is no problem renting out a G-reg provided that it is maintained to the specified higher standard.

You can rent it out for as much as you want - £10000 per hour would be 100% legal.

So long as you the owner is not sitting in the plane while the renter is flying it, the operation cannot be regarded as PPL Cost Sharing which has the requirement that the pilot does not make a profit, and there are no restrictions on how or how much the renter pays for it.

For example I could rent out (subject to appropriate insurance of course) my N-reg plane, but I must not be flying in it with the renter because then it would be PPL Cost Sharing, and that is banned in a foreign reg plane (ref ANO article 140); this ban applies only in UK airspace of course. I have this information directly from the head of aviation at the Department for Transport. It is likely that you will have a similar local regulation because I am sure that every country in the world prevents a PPL making a profit through cost sharing a flight.

My feeling is that selling hour blocks is 100% legal everywhere, so long as you (the owner) is not in the plane when the renter is flying.

If you were in the plane when the renter is flying, then it might be a legal grey area, and there are a few of those :) I think most people would think it is PPL Cost Sharing and you would get done. But it would depend on the details of your relationship, agreement etc. I am not a lawyer...

Also make sure that the check flight is done free of charge (i.e. outside the hour block purchased by the renter) otherwise somebody could get you for illegal cost sharing ;)

I used to rent mine out, years ago, and had to stop doing it because most of the people I got were totally unsuitable and would have just wrecked the thing. You will be facing the same problem. If you have a nice plane then you will want to be fussy, but if you are appropriately fussy you will not get many takers, because most good current pilots are already owners of their own planes...

[Blue Albatross]

Hi IO540,

Just to answer your question, I am actually flying on a UK CAA issued JAR PPL(A) so I guess that probably complicates things even more or not?

It's so damned annoying that to do something so simple results in having to triple check everything with three separate authorities, each of which have their own levels of (in)flexibility :-)

[BackPacker]

For example I could rent out (subject to appropriate insurance of course) my N-reg plane, but I must not be flying in it with the renter because then it would be PPL Cost Sharing

Just curious. If the renter is legally acting as PIC, then you are just a passenger along for the ride and you are not in any way using any pilots license to claim any privileges/hours. I would assume that that would mean that PPL Cost Sharing regulations do not apply.

I mean, if I'm a regular passenger aboard a commercial aircraft, the rules, regulations and economics of the flight don't change one bit with the fact that I accidently hold a pilots license or maybe a share or two in the airline, do they?

By your logic, the renter can take any passenger he wants, unless the passenger accidently holds a pilots license, or accidently is the owner of the aircraft. That would be odd.

I do agree with having to maintaining the aircraft to a possibly higher standard than what would be required for a purely privately-operated aircraft.

BA, I see you're based at EHLE. It might be worth checking this with Bert Huizinga from Wings. I know of at least one aircraft in his hangar that's privately owned but rented out occasionally via Wings. Perhaps he knows more about the legal issues, and who knows, he might be able to act as an intermediary for you.

[Lucy Lastic]

That's a really good question.

If I wanted to rent out my little G-reg PA28 because I'm not using it much, the maintenance is clear. It is maintained under Part M to old 'public cat' standards.

But as far as the CAA is concerned, anyone who wants to 'borrow it' and pay me £1000 per hour for the privilege needs to have a share in the aircraft or in the group - min 5%.

If it happens to be a fellow club member who might want to use it for a quick trip somewhere, that is rental.

So, I think, is selling blocks of hours.

So how does that work within the CAA's regime, not noted for flexibility.

[IO540]

I am actually flying on a UK CAA issued JAR PPL(A) so I guess that probably complicates things even more or not?Yes :)

For a G-reg, all money being paid makes the flight "aerial work" (and needs a CPL pilot, plus in most cases an AOC) unless you are covered by one of the exemptions. For these, search caa.co.uk for a leaflet called "summary of public transport" and you will be suitably enlightened :) PPL Cost Sharing is one of these exemptions but this exemption applies only to G-reg (which is the other reason why cost sharing in an N-reg is illegal in UK airspace).

As per ICAO, the G-reg cost sharing exemption is valid worldwide (unless cost sharing is banned by the local airspace owner, of course).

The use of a UK issued PPL has no relevance here, AIUI.

I haven't got a clue what the situation is with an F-reg plane (flown in the Netherlands, or other places). This would be up to the DGAC. I am sure any French pilot will know, because cost sharing is common everywhere. Or if you can penetrate the DGAC switchboard (French language desirable, IME :) ) you could call them. But if Holland is like the UK, they will ban cost sharing in "foreign" registered (e.g. French) planes in their own airspace. I would expect such a measure to be widespread, because (due to aviation industry protectionist practices :yuk: )

But as I say I don't think the OP is cost sharing - so long as he stays out of the plane when others fly it.

If the renter is legally acting as PIC, then you are just a passenger along for the ride and you are not in any way using any pilots license to claim any privileges/hours. I would assume that that would mean that PPL Cost Sharing regulations do not apply.I agree. But this is not what the DfT claimed. They basically said (foreign reg case) that if the owner is flying with the renter, and the renter is paying over money, they would regard it as Cost Sharing. Of course they probably would say that...

You can sort of see their point, because if I could rent out my plane for $1000/hr and also fly with the renter, this could be a cover for on-demand charter. There are loads of dodgy charters going on all over the world, and AOC holders (who paid 5 digits for their AOC) are for ever hassling their national CAAs to bust such and such operator. The renter (with a PPL) could be a front man who sits in the RHS and behind him are the real passengers who are paying.

But imagine an accident in which a renter is injured, and stands to get a much bigger payout if he can lie a bit and nail negligence on the pilot? Under UK law (the Civil Aviation Act) the owner.operator is liable to passengers only if found negligent. So if the renter has a prang and he or his passengers is injured, and the owner is not on board, the insurance is his only recourse, but if the owner is on board (and hopefully got killed so cannot dispute anything) then the renter has a massive incentive to say the owner was PIC and was getting paid. Then he becomes a "passenger" and gets a bigger payout, but the owner (or, if dead, his estate) is going to get shafted because it was an illegal flight and his insurance will take a walk, so his estate is going to get stripped. Of, course, people never lie to get an extra 6 digits. ;)

But as far as the CAA is concerned, anyone who wants to 'borrow it' and pay me £1000 per hour for the privilege needs to have a share in the aircraft or in the group - min 5%.No, the min 5% share applies only to planes not maintained to PT requirements. If you maintain it to PT requirements, you can rent it out to 500 Mongolians who all use fake names and each pays you £1000/hour :)

In the UK, and probably most other places, there is also the tax angle to consider. This is a major gotcha and cost me a 5-digit settlement some years ago. Nowadays, the Inland Revenue are a load of crooks who randomly hit anything to do with horses, boats, planes, prostitution, or especially anything where the business involves a hobby of the owner, and extract settlements.

A favourite line of attack is Benefit in Kind. If the plane is owned by a limited company (and if you are renting it out you will want to do that, because under the Civil Aviation Act the owner/operator is strictly liable for all damage on the ground) then if the owner also flies the plane, he is vulnerable to an attack under BIK. One defence is for every pilot to be a shareholder, and this is how most UK ltd co. syndicates get around it. Another is for the owner to have no interest in flying and no pilot license and never fly in the plane. But the sale of hour blocks as proposed by the OP above (which is done by most of the "zero equity" operations that exist around the UK) may well satisfy the requirement for every renter being a shareholder. IMHO it may not because the total shares which can be sold to shareholders cannot exceed 100% (obviously) but these zero-equity operations are able to sell as many blocks as they want, not limited to 24/7/365. I guess they did a deal with HMRC on this.

I am sure that Holland has similar tax rules, and a similar (owner liability limitation) reason for putting a rented-out plane in a limited company.

Personally I would think several times before renting out a plane that is even half decent. It is going to get trashed - unless you are quite fussy about who flies it. I also had a few crooks trying to do things, to lie about their flying times, etc.

The best way is to put together a syndicate of people who know and trust each other.

[Lucy Lastic]

No, the min 5% share applies only to planes not maintained to PT requirements. If you maintain it to PT requirements, you can rent it out to 500 Mongolians who all use fake names and each pays you £1000/hour http://images.ibsrv.net/ibsrv/res/src:www.pprune.org/get/images/smilies/smile.gif

In the UK, and probably most other places, there is also the tax angle to consider. This is a major gotcha and cost me a 5-digit settlement some years ago. Nowadays, the Inland Revenue are a load of crooks who randomly hit anything to do with horses, boats, planes, prostitution, or especially anything where the business involves a hobby of the owner, and extract settlements. A favourite line of attack is Benefit in Kind. If the plane is owned by a limited company (and if you are renting it out you will want to do that, because under the Civil Aviation Act the owner/operator is strictly liable for all damage on the ground) then if the owner also flies the plane, he is vulnerable to an attack under BIK. One defence is for every pilot to be a shareholder, and this is how most UK ltd co. syndicates get around it. Another is for the owner to have no interest in flying and no pilot license. But the sale of hour blocks as proposed by the OP above (which is done by most of the "zero equity" operations that exist around the UK) may well satisfy the requirement for every renter being a shareholder. IMHO it may not because the total shares which can be sold to shareholders cannot exceed 100% (obviously) but these zero-equity operations are able to sell as many blocks as they want, not limited to 24/7/365. I guess they did a deal with HMRC on this.

That is a full and informative reply.

I've always wondered how some of these groups operate.

A friend has told me about a group where they have access to some aircraft owned by the organiser. They all pay a block amount and payments go through another company who owns and operates the aircraft.

The group itself isn't a company so they aren't exactly share-holders and there is no real limit to the number of members.

In short it is a private flying club renting the aircraft from another company.

[IO540]

I would also add that the other publicised defence to an attack under BIK (renting the plane to yourself at the same rate as charged to the outsiders) can be considered void, on the grounds that the business was "not set up to make a profit".

This is a difficult accusation to defend (which is why the HMRC crooks use it) if the business has not actually made a profit (not paid any corporation tax). You could set up a totally pukka business (as I did) but if you are a pilot yourself they can still hit it.

And with a half decent plane it isn't going to make a profit, because the 25% writedown (capital allowances) will wipe out any operating profits quite nicely. (The 40% writedown rate is not available on rented-out assets).

Something to watch for UK based renters ;)

I am sure a competent Dutch accountant (specialising in boats, horses, planes, prostitution :) )will know more, but this kind of crap is another reason why "casual renting" (whether or not one has sold a block of hours in the hope of incentivising the renter into actually doing some flying) is not a good way to approach things if the owner is a pilot and his objective in this is operating cost sharing.

It works well with renting out a fleet of wrecked spamcans :ok:

[englishal]

Could one as the owner not temporarily "sell" a share in the aeroplane to someone else, and then buy it back?

I looked at "renting out" and came to the conclusion that the way to do this was to make the "renter" a member of the group, and add them to the insurance policy in the same way as a normal member (subject to them paying any additional premium).

Then sell them a share temporarily for an amount equal to the insurance excess (plus any additional premium due) and block time. After they have sucessfully completed their flight, I'd "buy" back their share for the same as the insurance excess "deposit".

Likewise I have a few select people who I'd be happy to let "borrow" my aeroplane (for costs). As such I'd name them on the insurance policy.

[IO540]

I think that the issue here is that all will be fine until there is a prang, and then the injured party has a huge incentive to spill the beans, or lie outright as it suits him.

If you sell a formal share to somebody, they don't have to sell it back to you afterwards :) Unless you also get them to sign a post-dated share transfer back to you, but the last time I spoke to a lawyer about that he said this voids the transaction. But it may depend...

[ab33t]

Group sharing is the legal way to go , even on a N reg plane in the UK , sell shares , I think its max 4 .

[IO540]

There is no max on N or any other reg, other than the 5% mentioned by Lucy if not maintained to PT standards.

Where a limit of 4 might come on an N-reg is that above 4 the DfT will not give the "aerial work" training permission (max 4 shareholders, or max 4 Directors of plane is owned by Ltd Co - details on the DfT website somewhere).

[flybymike]

IO540, Don't know whether you read "The Times" but there is an article in today's edition which takes a similar view to your own (with which I have some sympathy) with regard to HMRC's "crook like" shenanighans, and even suggests that "HM" should not allow her name to be used by such a nefarious bunch.

[IO540]

I haven't read it, but "everybody" knows they do this. Their approach is that any businessman actually making money is not really after justice but just wants to write a cheque to get hassle off his back. They open up an "enquiry" and run it for a couple of years, which is enough to break down the endurance of most people. An inspector can run several dozen "enquiries" concurrently, and he will collect a minimum of £10k on each one. The inspector is not on a % of collections but he gets promotion points according to the total recovered which amounts to the same thing.

I think most modern countries have a BIK rule of some kind otherwise you could buy a plane using business funds, and just use it for private use. I think the CI and IOM don't have this :)

[Blue Albatross]

Hi Everyone,

Just wanted to thank you all for your help. Very useful advice and things to consider, especially from IO540.

I rang the French DGAC yesterday and surprisingly got through to some very friendly and helpful English speaking department heads.

As far as the French are concerned, they don't care if I rent out the plane to another PPL, or for how much, as long as it's insured and that the PPL who's flying does not carry "fare paying passengers" which is pretty much what I expected.

However, they could not tell me what would happen if the pilot was found to be carrying fare paying passengers (sans myself being present) if I would be liable to prosecution or not. So they've given me the contact details of the relevant department and I have written them a letter to clarify.

On the Dutch side, things are not so easy (as expected). Nobody in the IVW (Dutch equivalent to DGAC) could tell me they were the right person to inform me about this subject matter, and they also mentioned the Belastingdiesnt (Dutch Tax Authorities) requirement to be informed of any "revenue generating activity" so, it seems from the Dutch end, they've scuppered my plans.

@Backpacker.....I'll give Bert a shout and see what he can advise

Will inform you all the on the final outcome once I get all the relevant information from the authorities.

[IO540]

On the Dutch side, things are not so easy (as expected). Nobody in the IVW (Dutch equivalent to DGAC) could tell me they were the right person to inform me about this subject matter,

I cannot see how in the UK the owner could be prosecuted if a renter breaks the law and the owner knows nothing about it. But the Netherlands might have such a law.

Over here, the owner/operator is strictly liable (which basically means he has no defence) for damage caused on the ground in a crash. Normally the insurance will cover this but if the renter had e.g. a fake license (which is not at all uncommon; lots of people boast about having such and such papers, and I have even known instructors with bogus qualifications) the insurer won't pay out. If the pilot's medical has expired by 1 day, they won't pay out. Aviation insurers normally pay out without much trouble but won't if the flight was illegal before it got off the ground. This is basically why most people renting out their planes do it via a limited company.

and they also mentioned the Belastingdiesnt (Dutch Tax Authorities) requirement to be informed of any "revenue generating activity" so, it seems from the Dutch end, they've scuppered my plans.

You need to see an accountant.

But there is a basic principle here. If they tax the income you are making, then they are classifying your activity as a business (which incidentally is not the same thing as employment) which means that you can offset your operating costs against your income, and you pay tax only on the net taxable profit.

And I bet you that any accountant with 2 braincells will prepare accounts showing no overall profit. To make an overall (taxable) profit on renting out a plane, you need to rent it out for somewhere of the order of 100-300 hours/year. The only way you will achieve that many hours would be by pretty care-free marketing (which will trash it pretty fast), or by leasing it to a school (which will trash it even faster) :)

The question is whether you can be bothered setting up your activity as a business, via a limited company. I wouldn't bother. Far better to find somebody you can trust and let them buy a share, and share all the costs, in the usual way.

People have often set up limited companies and VAT registered them, so they could reclaim the purchase VAT on the aircraft. For any reasonably decent plane, this is a massive amount of money recovered e.g. £35,000 on a new TB20. But it was a stupid approach, because all renters (including you the owner) then need to be invoiced at the rate "plus VAT" and this continues for ever... so the initial saving was an illusion. A much better way was to purchase the plane via Denmark, zero VAT, but this option ends 31st Dec 2009 so I guess more people will be going back to the VAT reg'd company route... but aviation business is tough and so many renters cause trouble.

[flybymike]

People have often set up limited companies and VAT registered them, so they could reclaim the purchase VAT on the aircraft. For any reasonably decent plane, this is a massive amount of money recovered e.g. £35,000 on a new TB20. But it was a stupid approach, because all renters (including you the owner) then need to be invoiced at the rate "plus VAT" and this continues for ever...

Not at all stupid, because VAT can then be reclaimed on all fuel purchases, maintenance etc , also a massive amount of money.

[S-Works]

Not at all stupid, because VAT can then be reclaimed on all fuel purchases, maintenance etc , also a massive amount of money.

Hell have no fury like the Vat man scorned........

I have never run an aircraft through a company or been VAT registered for it. I pay out of my taxed income for my hobby and sleep easy at night knowing that I am not going to get a knock on the door....

[IO540]

Not at all stupid, because VAT can then be reclaimed on all fuel purchases, maintenance etc , also a massive amount of money.That benefit is also illusory but in a less direct way.

The benefit is present if the amount reclaimed on purchases is at least as great as the amount invoiced to the renters.

But if that is true, it implies that the business is constantly cash-negative (taking the simple assumption of all transactions being subject to VAT, which is not quite so e.g. insurance) and that means that by the time capital allowances are properly introduced, it will definitely make a constant and sizeable tax loss.

And then Inland Revenue will get interested.

There is no problem with a business making a constant loss, until the proprietor is found to have a hobby which is aligned with the business activity....

One way is for the plane to be owned by one's main business (if one has a main proper business e.g. manufacturing some stuff) and then it becomes just another business asset, with VAT reclaim working normally. But BIK is an issue there too, of course. I know of very high hour pilots who do 100% of their flying on business and it works fine for them, but not many private pilots are in that position. An awful lot of corporate jets are operated in this way, but they are not (ostensibly) used privately.

Another approach is to reach an agreement with HMRC prior to starting the aircraft operation. The worst they can do is say NO but in practice they are likely to agree to some apportioning.

I have found the Inland Revenue to be total in-your-face blatent crooks, but have found Customs & Excise to be totally proper, and I have had loads of VAT inspections over the years. Which is curious since C&E have much greater powers!

[S-Works]

The tax man and the VAT man are now the same agency. It will be interesting to see who corrupts whose powers.....

[Blue Albatross]

Hi All,

Just a quick update. I got a phone call from the Dutch Civil Aviation Authorities who confirmed that they have the same train of thought as their French colleagues...i.e. they don't mind who rents and for how much as long as the plane is not used for "revenue generating" flights....which is fine by me.

The Dutch guys also said that as long as the plane is maintained to it's standard levels (i.e. usual 50 & 100 hour checks, annual and CofA) then they do not see the need to change anything. So if the plane is airworthy, properly maintained, insured and used for private flying purposes only, then it's OK with them.

Last group to check are the Dutch Tax authorities, which is most likely where the road-blocks will be.

Will keep you all posted.
B.A.