All at Sea with VAT

 

All at Sea with VAT
By Richard J Bach LLB
Managing Director: Safehaven International Limited
And
David Huyton, VAT partner: Moore Stephens
Published in Offshore Investment, July/August 1995
 
Since writing for Offshore Investment in Issue 38 (July/August 1993) we had hoped to report on some progress on the effects of the implementation of the Simplification Directive on Value Added Tax (VAT) (92/111/EEC) as it related to yachts berthed in European Union waters.
 
Some thirty months on, the mists of uncertainty wallow around this Directive, and the sirens have begun to clamber into the rocks to lure the would-be avoiders of VAT to an uncertain fate. We shall report below on some of the schemes of avoidance that have been promulgated and render some further points for consideration.
 
The catastrophe in the making passed by the European Commissioners on the 14th December 1992 required that all new and used yachts up to eight years old used by residents of the European Union (EU) within the territorial waters of the EU be VAT paid. Further, vessels owned by non-EU residents which do not qualify to Temporary Import (TI) will also have to pay VAT. (We must confine the scope of this article largely to the use of private pleasure yachts and not those that are commercially chartered as a business; for which a whole range of different liabilities apply).
 

The Directive required member states to implement the same, and, being introduced prior to the Directive to harmonise VAT rates, cast the die for anything other than a harmonious reception.

Britain, the architect of the document, Eire, Portugal, Germany, Denmark and the Benelux countries all duly obliged, and have collected from their nationals and all of those who misfortune it was to fall into the trap.

The Spanish initially suffered from a dichotomy of application. On the mainland the Directive was apparently largely ignored, although there are ways to pay if one wishes to volunteer to do so, but the authorities in the Balearics saw the Directive as a great money-spinner and have been actively assessing the hapless occupiers of their marinas for the back VAT.

It is interesting to note that, as Spain had a ‘standard’ rate of VAT (15%), since January 1995 16%, and the assessment of market value on used vessels has been somewhat cavalier, some parties had been seduced into paying it there.

Recent intelligence has indicated that parties deliberately misleading the Spanish authorities as to the realistic market value of their vessels have been caught out by the Hacienda who have determined the real value from the boat builders.

Portugal and its satellites, the Azores and Madeira, have also illustrated an example of Euroschizophrenia. Reports from the mainland, where the current rate is 16%, indicate a stiffening of attitudes towards the compliance with the Directive, and vessels with EU users are more frequently asked proof of VAT payment. The islands, on the other hand, have proven to be VAT paradises where payment may be undertaken at 12% on the market value of the vessel.The remaining countries with a Mediterranean shoreline have taken a more reluctant stance.

In Italy, a country burdened with too many bureaucratic institutions, the manner and method of paying VAT has been largely frustrated. In general, if you are not an Italian resident, the authorities do not want to know. This extends to problems in obtaining a ‘paid’ certificate on a pre-1985 vessel which is deemed paid, or even arranging to pay on a non-Italian vessel lying in Italy.

Current indications are that Italians are due to review the Directives provisions on the 6th June 1995 (too late for further amplification in this article) but it is likely that they will continue their policy of sitting on the fence and waiting to see what position the French will adopt.

In Greece the authorities are unenthusiastic about implementation, and those who must pay apparently have been paying VAT on ‘user friendly’ values. They should take note of the consequences of so doing if a swoop as is in process in Spain follows Greece.

The French have, as no doubt the others above have, realised the dangers of the Directive. The loss of tourism and revenue from the maintenance of a large number of pleasure craft in their waters, as already experienced when a tonnage tax was implemented, and later repealed, stung the French. As vessels were driven away before, some never to return, a continuing chain of deferrals of implementation have been experienced in France. We are, as yet, uncertain of the position of the Chirac administration on this issue at the time of writing.

Deferral of itself is unsatisfactory, and the question of ‘Do I pay?’ or ‘When do I have to pay?’ has lead to a defection to non-EU ports for long enough to do it, and a severe downturn in both the new and used boat markets.

All this means is loss of jobs and revenue, and we can only hope for an amendment of the Directive along the lines and for the same reasons that the Luxury Tax on yachts was repealed in the United States at the end of 1993.

In the meantime, the enterprising architects of avoidance have been at work, and have sought to introduce schemes to defer or avoid VAT.

In general terms, the avoidance schemes fall into the following categories:

a)                          Leasing schemes – these normally involve a series of lease and leasebacks through a network of offshore companies. The penultimate step being the lease of the boat to a company established in the EU. This company leases the boat, usually on a bareboat basis, to the beneficial owner who uses the yacht but with a liability to VAT on the leasing charge to the beneficial owner.
b)                          Yachts used partly for business. This involves the owner of a yacht forming a charter business with the aim of full recovery of Vat on the yacht. A liability to VAT arises on the charters in EU waters.
c)                          Payment of the VAT liability on ‘favourable terms’. This involves negotiation of a favourable valuation, preferably in a member state with a lower rate of VAT.
d)                          Registering the vessel on a commercial register. Luxembourg and the Isle of Man have newly formed commercial registers for large yachts. It is hoped by many that registering the yacht on such a register will lead to VAT exemption as Article 15 of the Sixth Directive appears to allow such treatment.
 
Concerns
 
Some of the concerns one may have about these schemes would be:
 
i)                           The charter must be commercial. When put to the test, it is difficult to see any elements of commerciality where, as is often the case, the charter may be at a low rate and, even if not, at the very least to a single or limited specific group of charterers. It would be relatively simple to then determine that the charter is anything but arms’ length. While this may not be a VAT consideration in some states, it may have other tax planning consequences.
ii)                          Rulings as to the acceptability of such schemes may well be limited to one or two EU countries. If the vessel is to be used in other countries, particularly if is to based and hence, be considered as having a place of establishment in that country, rulings as to the acceptability of the scheme should be sought in all countries of use and particularly that of the vessel’s permanent mooring (see below).
iii)                        The charter of a crewed vessel in each EU state will normally be viewed as a supply in each state and will be liable to VAT on the cost of the charter pro rata and at the appropriate rate of VAT in each member state the vessel visits. This will be an administrative nightmare in poorly structured schemes! As regards bareboat charter the place of supply would normally be the business establishment of the company which charters the vessel. However some revenue authorities (particularly the French) may not be happy to have Dutch or UK VAT paid upon vessels which remain permanently berthed and operating in French waters.
iv)                        Maritime law is very complex. If the vessel is co-owned, or can be alleged to be the sister ship of another vessel, there is the potential danger of arrest if a maritime lien attaches to the other vessel.
v)                         Check that the vessel can be legally chartered. A code of practice regarding chartered vessels will be issued in the near future in the UK as a number of yachts are currently operating outside the requirements of SOLAS (the Convention on the Safety of Life at Sea) and the Merchant Shipping Acts.
vi)                        Most member states require strong evidence to demonstrate there is a business before they will refund the VAT. It is understood that France monitors such business for 6 months before a refund is made. If the authorities review this situation at a later date and at that point note that there is no business it is likely that the VAT must be repaid. Additionally, most taxing authorities would levy a VAT liability on any private use by the beneficial owner or similar persons.
vii)                      It is known that several owners have paid VAT on exceptionally low values. It is also known that some member states have challenged such payments and some have tried to levy a further VAT charge. The writers are aware of one situation whereby the Spanish mainland authorities were refusing to accept that VAT had been paid on the correct value in Palma and attempted to levy a further VAT charge.
viii)                     Whilst such registration may well gain VAT exemption some time in the future at the time of writing it is understood that registration does not affect the tax situation of a boat. Owners should also be aware that once registered as a ‘commercial’ yacht the vessel is subject to many more maritime regulations, and such restrictions may outweigh any VAT advantage.
 
Leasing and Hire Purchase Schemes
 
The schemes make use of the type of programmes available for motor vehicles which, as a means of transportation, has encompassed yachts in VAT legislation.
 
The original buyer of the yacht concludes an agreement with a finance company which then owns and registers the yacht and leases or hires the same back to the original buyer by way of a lease or HP agreement. Under the current rules, it is permissible for the finance company to receive a credit for the VAT paid, and, privately, the benefit can be passed on to the original buyer.
 
i)                    Obviously the financial strength and credibility of the finance company must be taken into consideration.
ii)                   The contract must be carefully reviewed as it will mean that the ownership of the vessel will be in the hands of parties other than those actually funding the purchae.
iii)                 There is a distinct maritime lien danger over all of the sister ships ‘owned’ by the finance company. There should be some provision for protecting the individual subscribers from the malfeasance of their co-members.
iv)                 As above, the acceptability of such schemes should be considered for every member state visited by the yacht.
v)                  Such loopholes only exist for as long as they do not become scrutinised and overridden. Laws can and do change.
 
Possibly the simplest way of reducing the VAT burden would be the use of the Directives as they stand. If the vessel is new, take physical delivery outside the EU for at least three months, more if possible, and accumulate at least one hundred engine hours so as to ensure that the vessel is no longer deemed as ‘new’. Make use of the variation in rates of VAT, and the values levied by the individual states, in existence when importing the vessel to the EU. Always bear in mind that the market value is a matter for discussion and agreement with the Customs at the place of importation. Also bear in mind the investigation powers of Customs, and that the onus of proof lies with the declarant.
 
Purchasers can take advantage of schemes such as the above, but they should be aware that the revenue authorities will seek to close loopholes and scope for such schemes will no doubt diminish.
 
The leisure marine business has seen many changes in the last thirty months, with matters ranging from the implementation of the Directive, or otherwise, to registry rule changes, codes of practice and a 2.5% insurance premium tax in the United Kingdom effective from the 1st October 1994 which will affect any vehicle, including yachts, registered within the United Kingdom. We anticipate a busy year ahead, but no simplification of matters for practitioners in this field.
 

Posted in Published on 01 Aug 1995