light aircraft & Inland Revenue
 

can anybody help with some tax advice ?

I am a director of a Limited Company and we are planning to purchase a light twin, and hire it out

in reality I will practically be the only pilot hiring it !! I anticipate that there will be about (only) 3-4 flights per year when the aircraft is hired by other pilots

Does anybody know whether the limited use by other people is enough to prevent the Inland Revenue from treating it as a "benefit in kind " Flying is expensive enough without this added problem !

thanking you in anticipation..

Don't see why that should be a problem, provided of course that you pay the company a reasonable rate for the hire, such that the company doesn't actually lose money over running the aeroplane. Otherwise you're stuffed, of course; the IR (mostly) aren't stupid.

Been through that loop, if you run it through the company you work for it is a benefit in kind. The easist way is to have a seperate ltd company run the aircraft and you rent the aircraft from it at a reasonable rate.

Even if you do as Bose-x suggests you may still find the Ir treat it as "not an arms length transaction" and you could end up with taxationfar in excess of any possible benefit. Seek advice from your corporate accountants. If they do not understand the rules then get a tax lawyer who does. Aircraft in the circumstances you describe may not just a benefit in kind. Just warnings to heed and I cannot in any way offer advice.

VH,

You haven't given your location, but as you say the "Inland Revenue" I'm assuming you are in the UK. (It is important!)

I'm a professional accountant & tax advisor, but unfortunatly, as I'm based in Ireland, I have little knowledge of the UK system.

Having said that much of the UK tax system is similar to the Irish one, at least in principle. So I'll explain the position as I believe would apply in Ireland.

A benefit in kind is exactly that, a benefit in kind. The important part of this is that you must get a benefit. If you make no personal use of the aircraft, then you do not have a benefit, and therefore do not have a benefit in kind. If you reimburse the company for any personal use, at a rate which you could have hired the airplane from someone else at, then you have received no benefit, and have no BIK.

However I suspect (as will the revenue) that the purpose of this is to subsidise your personal flying, and unless you can prove otherwise, you will have a BIK exposure.

I hope this helps.

Obviously all the usual disclaimers apply! Don't take my advise. You should contact your own professional adviser!

dp (The flying accountant;) )

ps. If you geneninly need the airplane for business use, and either won't be making any personal use, or will be reimbursing the company for any personal use, and are worried about the BIK, you could consider contacting your inspector of taxes and asking for a ruling in advance.

Vanhigher

There are several issues with running the a/c using a company, I have several clients (including me!) who do this with a/c ranging from Pitts Specials to Gazelles, and how you set it up depends on a number of factors, such as whether or not there is VAT involved, whether you are going to do lots of expensive work on the a/c, what your plans for the future of the a/c are and who currently owns it.

Personally, I use the route suggested by Bose-x. The company merely operate the a/c with the benefit of a full repairing and insuring obligation. I own it personally. I pay a market rate for the use of the a/c. This I worked out by taking the local flying school rate, and adjusting it for the fact that the company has no capital tied up in the a/c. This avoids any BIK problem.

The company pays everything, including the cost of a rebuild, but apart from a few bits and bobs, owns nothing. It never makes a profit, and is supported by its' directors. (You have to watch the trading whilst insolvent rules)

The company can register for VAT, but you then have to charge yourself VAT, so it's only worth it if you are expecting the VAT recalims to exceed the extra cost to you. You can de register if turnover is below the thresholds, but if you do, the C&E will expect you topay VAT on the assets in teh company, subject to a deminimus, so better to own nothing.

The company pays you an annual lease payment of say £5 for the use of the a/c. You could then run a further arguement with the IR that you are persoanlly trading and generate some capital allownaces loss relief. If you do, and win, please post here!

If you put the a/c in the company the payements to the company for using the a/c will need to reflect the full market rates to avoid a BIK charge. The secondary problem with doing this is the tax position if you ever want to remove the a/c from the company. You might need to think about, either lending the company the money to buy the a/c (any interest it pays you will be taxable on you even though it is your money going round in circles), or subscribing for new shares in teh company to the value of the a/c. The later route makes extracting the a/c later more tax inefficient.


I have started to look to see whether a limited liability partership might not be a better route; when I know, I shall let you know.

If you want anything else, assuming you don't think the forgoing to be a load of bollocks, feels free to pm me.

If you put the a/c into your normal trading company (ie your proper job business) yuo can expect all manner of agro.

This is a very complex area and even the Inland Revenue sometimes have difficulties getting it right. If you are a "higher paid" (>£8,500 pa) employee or a director of a company and the company makes available to you an asset for your personal use, you will be liable to tax on the corresponding benefit. In this case, the gross benefit would be the aggregate of:

1. 20% of the market value of the aircraft at the date it is first made available; plus

2. any additional expenses (these would include all operating costs disbursed by the company).

The gross benefit would then be reduced by all amounts made good to the company.

The problem is that in most groups, the amounts payable by the members are principally a reimbursement of direct costs (ie item 2 above). This still leaves the potentially significant 20% annual value on which tax will be charged.

As I said, the Inland Revenue themselves find difficulties with this legislation and many groups operate through companies without any problems. However, a word of warning: the Revenue's internal guidance manual on this issue has recently been amended and it is clear that they are taking a much tougher line :(

And, no, I don't work for the Revenue, I am a tax adviser and I will freely admit that this area of taxation is not my particular specialism.

Aiglon

Ludwig,

I have also looked at this and I think there is a problem for group ownership in that an LLP has to be set up for the purposes of "carrying on a lawful business with a view to profit". Most (if not all) groups would generally escape taxation on the basis that any trading activity is mutual. I'm not sure this would work with an LLP - although I am by ne means certain.

Aiglon

The suggestion that:is unlikely to prove fruitful in the UK. The tax inspector will always start by saying "I can't give a ruling in advance, it will depend on all the circumstances including ones you haven't thought of to tell me about, what you have to do is do it first, then put in the tax returns, then I'll decide whether to clobber you after the fact".

Sometimes, if you're lucky, you can press them to say something like "well, as an initial guess, without knowing all the circumstances, if you were to do x I might feel inclined to treat it as y, but of course you can't hold me to this". It would be really rather unusual to do any better than this.

It's a minefield. I had an aircraft that I rented to a flying club via my company. I had 5 years of arseache from the Revenue over it. It was mostly down to a particular inspector who consistently failed to get the facts right in the Revenue's favour. I think the problem only went away because either the inspector retired or upper "management" realised that the horse they were flogging had expired.

My accountant suggested three solutions:
1. Sell the aeroplane
2. Get another pilot into the company so the aeroplane effectively became a "pool" vehicle and not liable to BIK
3. Buy another aeroplane thus creating a "fleet" and losing the BIK applicable to a company vehicle.

Good luck

LowNSlow,

Your accountant's suggestions are interesting :rolleyes: Number 1 I can understand but the others are just plain wrong. The provision of an aircraft is taxable as a benefit under different provisions to those applying to "vehicles".

Aiglon

For what it's worth, I agree entirely with aiglon.

BIK on cars is totally different from BIK on anything else. Putting other people or things into the equation does not change the poistion necessarily; there is no reason why both partipants could not be taxed on the same BIK!

Still, keeps the fees coming in!

aiglon & Ludwig I'm glad I use a different accountant now!
I think part of the problem was that the Revenue refused to define the charge other than as a generic "Benefit In Kind"

Ludwig saidI well remember seeing a tax circular a few years ago along the lines of.
"The Inland Revenue have announced the end of the concession under which all of the expenses of keeping a horse for business purposes were allowable for tax puposes. In future horses will be treated in the same way as other means of transport and the costs apportioned according to mileage.":O :O :O

As a general principle BIK is calculated by apportionment.
If you have something which is provided by the company solely for your private use then all of the expenses incurred by the company in providing you with it would be treated as BIK and would be taxable (i.e. treated as income).

If it used used for mixed private and business use then the cost would be apportioned. How the apportionment would be done is arguable. The obvious way would be hours flown as these are records that are legally required to be kept.

If you flew say 10 hours on business out of a total of 60 hrs in the year the IR would allow one sixth of the expenses as a business expense and the remainder would be taxable.

Broadly speaking the IR's aim is to eliminate the tax advantages of "perks". Have a look at the formP11D that your employer has to fill in each year and you will see how they go about it. A true answer in section L is likely to incite some interest from them!

Again, I am not a tax expert.

Mike

I went through the same argument a few years ago. I got the "rates" for hiring an identical aircraft from the local flying club. Over the year, we paid (in total) very slightly more for the "group" aircraft than we would have paid for the club one.

The point made was that the BIK was zero or negative.

Whether that argument would hold up if used for the first time now, I don't know.

Cars are a specific and different case. The Revenue (or the Chancellor or someone) wanted to stop companies providing cars, so they came out with some very inequitable rules, which not surprisingly killed the Company Car business. Probably also helped the demise of the UK car industry.

Mike Cross said:

I don't wish to seem pedantic - although it helps when dealing with tax legislation :ugh: - but be careful here. The full amount of the benefit will be taxable and you would have to make an expense claim to get a deduction for the business element - the Revenue are unlikely to simply charge you the net amount. The legislation only permits an apportionment where the asset is used partly for the "provision of the benefit and partly to other matters". The Revenue's view is that "other matters" do not include business use by the employee/director. Use by other employees or by the company itself (eg hiring it out to third parties) are "other matters".

By the way, although there is strictly no apportionment, the Revenue do accept that if the asset is available to more than one employee/director, the benefit charge is shared rather than each being charged the full amount. What decent chaps :rolleyes:

Aiglon

It seems to be a bit of a lottery and down to individual tax inspectors/districts.

A few years ago I met a gentleman whose company had a small aircraft. He used it for business purposes and some pleasure flying. The inspector decided that he would do the apportionment on a daily basis - allowing the days on which he flew for business but charging him for all other days since the aircraft was available to him personally on those days.............

Funnily enough he sold the business, the aircraft and his house - taking his money and talent back to Canada!

Cheaper is to ask yourself: Does this entire complicated set-up exist solely to pay less tax, such that a simpler structure would have been good enough for the real business to be conducted? If the answer is "yes" you're stuffed.

(Plus don't forget you'd have quite a lot of costs to pay out, including real £100/hour programmers to sort out the messes made by the £10/hour ones whilst your clients are waving writs at you. And if I were called in to fix something in circumstances like that I'd quite likely want more than £100 - the rates always go up for obviously dodgy clients - and want cash up front.)

VORTIME great idea, when you have done that, can I have the job of sorting out the resulting Inland Revenue investigation please mucho fees; yummy!:ok:

I fly @150 hour per annum of which @35 is legit business travel, visiting clients, sales trips etc.

I charge my business a rate per hour for the business use, which I can justify to the revenue ie 1/150th of fixed costs( by which I include annual and scheduled and unscheduled maint) + fuel oil etc. It works out at less than I would have to pay a commercial organisation but the help towards the fixed costs is welcome.

So far the revenue have not passed comment and who's to say whether my trip to Joe client is a pressing need or just cos the suns shinning and I fancy some air time!

I dont rent to anyone else and am a partnership, my partner or other employees often come with me. Works for me!

I operate a plane through a limited company. It is used for private and business, and is also rented out to a couple of other pilots.

I did a fair bit of research and this is a summary of what I found out:

The Revenue permits private use of a company asset if the private use is fully reimbursed. How "fully" is calculated is debatable but it needs to stand up to scrutiny. A market rate would be a good start. If you fully reimburse private use, you are not subject to the 20% benefit in kind business, and that AIUI is how syndicates that operate via a ltd co get around that problem; every pilot fully reimburses his usage to the company.

I could not find a problem with owning a plane in the same company which generates your livelihood, other than if there is an incident and the insurance refuses to pay out, your livelihood potentially goes down the pan. So a separate ltd co which operates the plane is a good idea.

The more flights are done by other pilots (i.e. rental) the more commercial the whole thing looks, which helps with both the Revenue and VAT. Obviously if the plane is rented out, you certainly do NOT want it owned by the main business, for obvious liability reasons.

According to recent reports, the Revenue has tried to charge BIK tax on large company assets which are nominally available to Directors to use - whether they are actually used or not. A booking system (i.e. the plane is not available unless previously booked) has been suggested by one of the major UK accountancy firms as a defence against this.

The best advice I can give is to find an accountant who has other clients in a similar situation. With so few GA pilots flying on business that won't be easy.

aiglon

The Revenue's view is that "other matters" do not include business use by the employee/director. Use by other employees or by the company itself (eg hiring it out to third parties) are "other matters".

The above would mean that a plane used solely for business by the sole owner of a business would be subject to BIK tax. That clearly isn't so. You can travel on business any way you choose (so long as it isn't way over the top) and a plane is a perfectly reasonable way to travel. People who have a plane owned by their firm and use it solely for business have the easiest case AFAIK.

IO540,

That depends upon the precise circumstances - you need to read my post in full. If the aircraft (in this case) is made available to the director for business purposes ONLY - ie he/she is not allowed to use it for private purposes - then there would be no benefit in the first instance. However, if it was available for personal use, there would be a potential benefit. It is in this case that logic tells you that you apportion the costs between the business and non-business use and simply tax the non-business benefit. However, logic does not always feature too highly in tax legislation ;) and this is the point I was making. As I said in my last post (from which you selectively quoted), an apportionment can only be made between use as a benefit and "other matters". The Revenue's view (and I stress it is just that, their view) is that "other matters" does not encompass business use by the director. So, as I also said, the director would be liable to a full benefit charge but would be able to claim a separate deduction for the business use. In practice, individual Inspectors may simply charge the net amount but that is not the strict position.

In your example, assuming the asset was available (though not used) for private use, the strict position is a benefit charge on the full amount and a business expense claim for the business use. Cumbersome? - Yes. Messy? - Yes. Sensible? - No but strictly correct.

What sources did you research?

What is the authority of this statement? I would like to believe that it is correct, it certainly would be sensible but it is not supported by the relevant tax legislation.

Ditto. The legislation clearly requires reimbursement of the full benefit which includes the 20% of MV.

Aiglon

Aiglon,

The "research" was done by my accountant, a fair size firm with mostly corporate clients. Not exhaustive, of course.

The reality is that Directors are NOT getting taxed on the BIK just because they could in theory jump into the company plane for a private trip (having, as a Director, the authority to arrange it). Recently the Revenue has attempted to change that, and last I heard was that this is still ongoing. It would cause massive problems if they did that - imagine every Director of some big co. getting taxed on the BIK on their £20M exec jet. Even if their written rules were "no private use" a majority shareholder can just set them aside.

The authority for what I said about reimbursing private use came straight out of a Revenue (HMSO) publication which I read with the accountant, but I don't have it here. It was pretty clear (in itself).

The legislation clearly requires reimbursement of the full benefit which includes the 20% of MV

Can you give me the CCTA reference for this, and I will look it up? In your opinion, does having other pilots also renting at the same market rate (who are unconnected to the company operating the aircraft) help?

The problem with all this is that a) most people will not discuss this publicly and indeed they probably shouldn't, and b) when one talks to owner pilots one finds huge variations between local Revenue practice.

IO540,

My comments have all been about the strict legal position, indeed, I did acknowledge that some Inspectors my simply charge the net benefit.

I think we need to be alitlle careful here. The fact that many GA aircraft owned through corporate structures are not leading to benefit charges is (in my opinion) more likely to be down to the fact that these issues are simply not being picked up by Inspectors rather than a positive stance taken by the Revenue. In my experience, it is dangerous to assume that because an adopted treatment is not challenged, that means it has been accepted by the Inspector.

Not immediately sure what CCTA stands for but the relevant references to the Income Tax(Earnings and Pensions) Act 2003 are as follows:

Part 3 deal, inter alia, with Benefits, Chapter 2 being the basic benefits code and Chapters 3 - 9 dealing with specific benefits (cars, loans etc). Chapter 10 deals with "Residual Liability to Charge" and it is under this chapter that aircraft are caught.

S.205 (2)(a), in conjunction with s.205 (3) answer your specific question.

I am well used to researching tax legislation, I do it for a living, being a tax partner at a Big-4 firm. This area is not my specialism (as I acknowledged in my first post) but I have talked to a lot of people for whom it is, as well as reading the legislation (always the starting point) and IR manuals.

Aiglon

aiglon,

CCTA stands for company and corporation taxes act, I think. Thank you for the other reference, I will check it out.

IO540

That explains why I haven't heard of it, it is actually called "Income and Corporation Taxes Act" (ICTA) 1988. As you will see from my last post, all the relevant stuff has been moved from ICTA to ITEPA.

Happy reading .

Aiglon

I know of a guy who got clipped for in excess of 25k in BIK for his ownership of a four seater and that was approximately 10 years ago.

The inspector concerned assessed the hours he had used his company aircraft for business purposes. The hours the aircraft had been available to him; ie all daylight hours the aircraft wasn't being used for business, were calculated, costed using a hire rate of a similar aircraft from the local flying club and BIK charged on that amount. Unsurprisingly he sold the aeroplane to pay the tax bill. :mad: :mad:

LowNSlow

In the case you describe, did the company which owned the plane ever invoice the man for his private flights? If so, at what rate? If not at all, the said outcome would be expected.

light aircraft and Inland Revenue
 

I entirely agree with Aiglon's analysis of the rules.

The problem is one that often arises in tax, the government of the day passes legislation to deal with a particular "abuse", some time later when things have moved on a bright spark in the IR sees an opportunity to levy tax in entirely unforeseen circumstances.

In this instance, the legislation was introduced in 1976 when inflation was 20%, interest rates 15% and directors of private companies hit on the wheeze of getting the company to buy assets (all sorts of things, furniture, suits, lawnmowers etc) for their personal use on which they paid very litle tax. The intention was to stop this, and this legislation did precisely that.

However, aircraft are different, and times have changed. Inflation is 2%, interest rates 5% (say). But the IR have decided to use the legislation in its full force to tax company owned aircraft.

The rules can be penal, particularly where there is a genuine business reason for owning the aircraft, and little private use. In one case I am aware of the aircraft spends 85% of its hours on business use, but the IR are insisting the principal shareholder director pays tax on 20% of the aircraft's value each year.

If this problem is sufficiently big to make a significant difference to the way businesses operate, it may be possible to persuade the govenrment to amend the tax legislation. It is necessary to put together a compelling case and to lobby effectively, ideally via one or more aviation friendly MPs.

Anyone up for this? If so please contact me

overclock

As far as I can see, Inland Revenue practive varies hugely around the country.

Before I placed mine in a ltd co I discussed it in detail with my accountant in whose experience the Revenue rarely did the 20% BIK thing.

I think a lot depends on whether the Director (who as a result of his authority has access to the company asset) reimburses the Company for his private use, and does so on the same terms on which other unrelated users get it. I discussed this in detail with the VAT inspector and he told me that the reimbursement is very important to C&E.

Overclock,

You say the aircraft is used for business - is that for the business of the company that owns it? Where the aircraft is "privately" owned through a company but one of the group members uses it for his (day job) business use, that is irrelevant in the benefit calculation.

My point is not really to do with how "businesses" operate but the fact that "private" owners who choose to operate through a limited company are hit by the benefit rules in exactly the same way as directors/employees of "real" companies who have use of a company asset.


IO540,

Trust me, their attitude and approach has changed - I see it at work and in their revised manual.

By the way, how was your Christmas reading??

Aiglon

Not very encouraging - emigration is definitely the answer :O

IO540 I don't think the chap concerned had any formal system for paying the company for private use. Oooops.

LowNSlow

Well in that case he was asking for getting done big-time. The only more provocative thing is to keep a "recehorse on the firm" :O

On the general topic, if having a plane in a ltd co. in any circumstances becomes subject to the 20% BIK tax, owner pilots will have to make some potentially hard choices:

If you always fly the plane yourself, then liability is not an issue (because the pilot is jointly liable with the owner)

If others fly it (renting or syndicate) then you are relying entirely on the insurance company (who in aviation are not renowned for decency) for paying out, otherwise you risk personal bankrupcy. A limited liability partnership could be a solution here, especially as there is no minimum shareholding to qualify (so low-time other pilots would just get a very small share). My accountant has already set up quite a few of those.

Regarding VAT recovery, this is highly desirable but doesn't really depend on a ltd co; you can be an individual or a partnership just the same. But a ltd. co gives better separation of the affairs.

Some businessmen choose to take the 20% BIK hit on the chin, especially in the case of short life assets like expensive business suits. But this would be a hugely expensive way to run a good quality aircraft (suitable for business travel) as most of them have a MV of well over £100k and often several times that.

LLPs
 

IO540,

As I have suggested before, I am not convinced that a LLP will work for a private group since the LLP legislation requires that it be established for the purposes of "carrying on a lawful business with a view to profit". Clearly, a private group would not satisfy that requirement.

Aiglon

aiglon,

Why not? It would be lawful, and it could be run with a view to making a profit.

Whether it actually makes a profit nobody can tell - lots of real LLPs never make a profit anyway.

It could be argued that any present-day syndicate which is just a partnership is exposing its members to this risk, but nobody seems to worry about it too much. Probably because 3rd party damage is very rare in GA.

I have done a fair bit of research into the subject and engaged professional advisors. The thing that struck me going through the whole process is how subjectively the rules can be interpreted. I have now ended up with a corporate structure I'm comfortable with to limit my personal liability and that I feel I can justify to the taxman, but still I'm not 100% sure whether in 6yrs time a new tax inspector won't interpret the rules differently, landing me with a significant tax liability.

I've engaged lawyers, accountants and tax professionals, but none seem to be too experienced in the aviation area (most look at these structures for boat ownership, which isn't directly equivalent in certain circumstances). My question is, does anyone know any accountants/tax advisors who specialise in aircraft ownership structures? (I know they exist for the big boys but still haven't found any for GA business). Please PM me of anyone has direct experience.

Welcome to the tax system. Anyone who's come across IR35, for example, will recognise every word of that (except the one spelled "comfortable").

IO540,

I think it would be tricky for a purely private, group ownership 'syndicate' to argue that they were setting up a LLP (or anything else) "with a view to profit". How would they intend making that profit; bay charging themselves more than cost? OK, they could do that but it would be likely to lead to problems since they will be relying on the principle of 'mutual trading' to avoid tax. There are complications with regard to surpluses for mutuals.

Absolutely agree. Whether you actusally make a profit or not is not the point, though; what matters is intention. If there was a liability claim, I bet a good lawyer would have a go at the legal status if he/she could show there was never any real intention to even try and make a profit.

Aiglon

Aiglon, good point about a lawyer lifting the veil of incorporation. Are there any lawyers out there (FL?) who would care to comment on this; how robust is the limited liability afforded by a limited company if one sought to defeat or limited a third party claim to the value of the assets of the company, especaily as in many cases the only or main purpose of the company is to protect the "real" owners from such a claim. Would it help if one could demonstrate that the only or main purpose in having the company was for reasons other than limiting liability, for example creating a framwork in which the ownership of the underlying assets could be easily divided and transfered?

Isn't this issue of the most approraite legal structure for aircraft ownership perhasp something that AOPA should agree centrally with the IR? What thinkest thou?

Just a couple of additions to my previous post.

I understand from Martin Robinson at AOPA that some time ago AOPA agreed with the IR that putting an aircraft into a company, for the purpose of running a group owned aircraft,

"The IR in the end accepted that so long as the groups sole asset was the aircraft and that all the expenses went to the running of the aircraft that the directors of the limited company would not be liable for a benefit in kind tax."

This seems reasonable, although in the current climate may still be open to challenge.

In the case I cited (aircraft used 85% for the business purposes of the company) the assessment of the controlling shareholder director on 20% of the market value (and I ignore running costs here, but that's an issue in itself) the IR are strictly correct. Their position is fully in accordance with the legislation.

If the director concerned wishes to "make good" the benefit, it is not sufficient to pay a market rate for the use of the aircraft, he is required to pay an amount to the company equivalent to the benefit value calculated under the tax legislation.

I understand people have negotiated individual deals which may be much more favourable, but my position is that this isn't acceptable, people should know what the tax position will be, and the tax payable should be made to equate to the value of the benefit calculated on a basis that is fair and reasonable. We might argue what is fair and reasonable, but where the taxable benefit is far and away higher than what it would cost to hire an equivalent aircraft at arms length, it seems to me pretty unreasonable.

This is why I believe it's necessary to take this to a higher authority, if there is significant support.