Jet owners and operators with business activities in Europe face increasingly difficult tax issues from 2011 especially where the UK is an important part of their overall market. The problems bring into stark focus the perceived attractions of buying, selling and operating aircraft from jurisdictions such as the Isle of Man and Malta.
Universal Weather & Aviation responded to industry concerns when it introduced two new services - tax minimisation and online fuel tankering analysis. It opened UVair European Fuelling Services Limited in Shannon, Ireland, to help clients calculate VAT on their European fuel purchases, headed by general manager Steve Woods.
Woods says the new operation provides a VAT compliant and exempt invoicing service. "We are working with accountancy firms to obtain advice on how our clients can qualify for exemption from these taxes and enjoy the resultant fuel price benefits," he adds. "The service was launched with a detailed examination of the tax laws of nine European countries and has been expanded from there."
The service enables charter owners and qualifying aircraft to benefit from fuel savings that could be in the region of 20 per cent. However tax issues go beyond savings on fuel and affect the large capital sums inherent in acquiring aircraft for operation in the UK. Graham Brearley, senior manager Grant Thornton UK LLP, explains: "Under the European Union VAT system, it is normally up to the supplier to decide whether his supply of goods or services is subject to VAT.
However, from the beginning of next year the liability of the supply of an aircraft will depend upon the status of the purchaser and the use to which the aircraft will be put. That will not always be clear to the supplier, and it will therefore be necessary for the customer to provide evidence of the intended use of the aircraft by way of a 'declaration of status'."
Brearley warns. "All purchasers of aircraft will therefore need to take great care in future, as any relief from VAT which was based on an incorrect declaration could result in the imposition of a substantial financial penalty."
Under the current rules, an aircraft weighing in excess of 8,000 kilos can be purchased in the UK VAT free. However from 1 January 2011, unless the aircraft is 'of a type used by an airline operating for reward chiefly on international routes', it will no longer be entitled to gain relief from the tax.
Brearley says: "The new definition must be satisfied irrespective of the size of the aircraft and so it is more likely that private owners in the UK will have to account for VAT when an aircraft is acquired.
"However, things will get even worse for private owners because the standard rate of VAT in the UK will increase to 20 per cent just a few days after the new 'usage' rule is introduced. The rate change applies from 4 January. The combined effect of these changes means that a fairly modest jet costing £15 million will have a further £3 million added to the purchase price. Where the aircraft will not be put to any 'business use' for VAT purposes, the tax will have to be borne in full by the private owner. Even where there is some business use, the 'non business' element will still leave the owner with a significant additional cost. With such large figures at stake, the forthcoming changes are bound to have a major impact on the sector in the UK."
Brearley says that, while HM Revenue and Customs (HMRC) has published draft guidance on the application of the new rules, it is by no means clear how they will be applied to the general aviation sector. "What is clear though, is that the term 'airline operating for reward' - defined in the guidance as 'an undertaking which provides services for the carriage by air of passengers or cargo' - should apply to anyone holding an AOC. If the AOC holder also operates chiefly on international routes, it seems that all of his aircraft will be regarded as 'qualifying' and so will be eligible for zero-rating.
"The draft guidance also confirms that the term 'operating chiefly on international routes' means that the extent of the UK operator's non domestic flights must exceed domestic flights. It is, however, left to the operator to make the apportionment by a fair and reasonable method."
Brearley continues: "Although the turnover derived from international flight operations as a proportion of total turnover from all flights will be a major indicator, other information can be taken into account when making the split. Any method that is used will, however, have to be capable of verification by HMRC."
The guidance recognises that in certain situations, aircraft are not always supplied directly to an airline. "For example, the supply chain may involve an initial transaction to a bank or other intermediary. In circumstances where an aircraft is supplied to a bank or leasing company, the supplier can 'look through' the transaction (or series of transactions) and zero-rate his supply of the aircraft. However, that is provided that it is known at the outset that the ultimate supply of the same aircraft by the bank or leasing company to the end user will also qualify for relief."
He points out that aircraft operating in the business jet sector are often owned by a private individual, or at least owned indirectly by an individual through a corporate body.
"The aircraft owner will typically enter into an operator's agreement with an AOC holder, who will in turn operate the aircraft for reward," Brearley says. "It is not clear from the draft guidance whether, in circumstances where the owner has such an agreement with an AOC holder, the supplier will be able to 'look through' his supply to the owner (in the same way that he could with a bank or leasing company).
"If the AOC holder operates chiefly on international routes such that a direct supply to it would qualify for zero-rating, it would be inconsistent to treat the supply to an owner in a different way. It is also not clear whether an owner's private use of an aircraft should be taken into account by the AOC holder when calculating the extent of international versus domestic operations. In my view, such private use by the owner should be ignored because, according to the draft guidance and the proposed wording of the new legislation, it is only the use of the aircraft by the airline that is to be taken into account."
European owners that conduct business in the UK may be able to save millions of pounds by ensuring that their operation and acquisition of aircraft do not fall foul of tax disadvantages.