by Richard Bach, Managing Director; Safehaven International Limited

Published in Private Wealth Management 2001/2002

 

The perils of owning a yacht, and its associated VAT payments, can be hidden in documentation dating back 20 years. How does a yacht owner limit their VAT liability?

 

The sea is a dangerous place. Lack of respect for the elements can lead to disaster. Yet every year, the fashionable and well-heeled leap into larger and more expensive yachts, and cruise the playgrounds of the Mediterranean.

 

Of course, many – especially the newcomers – will take the appropriate safety precautions against adverse weather conditions. They install the latest navigation and safety equipment and hire competent crews. The dangers, however, are not confined to the open sea. Ports harbour perils that lurk in the form of value added tax (VAT).

 

For many years it was customary not to pay sales or VAT on the acquisition of a yacht. The British customs sponsored a “sailaway” programme where a yacht owner was exempt from paying VAT. This changed with the introduction of the simplification directive (111/EC/1992) in December 1992.

 

The simplification directive (SD) required that VAT be paid on all new and used yachts up to eight years old, ie all yachts built since 1985, belonging to residents of the European Union (EU).

Vessels owned and used by non-EU residents and/or corporations that did not qualify for temporary importation (TI) would also be obliged to pay VAT.

 

Member states of the EU were required to conform to the SD. This should have been relatively simple to implement, given that member states had been obliged to harmonise their rates of VAT. It was not.

 

In 1992, talk of harmonised VAT rates revolved around synchronising the EU member states’ VAT rates at 15%. Today, however, Madeira and the Azores charge a rate below 15% and the rates in the Scandinavian member states climb steeply between 16% and 25%.

 

The net result of such disharmonisation is the prevalence of rate shopping when new vessels are purchased. This can be bad news for the consumer when the vessel is imported into the state where the VAT is legally due.

 

 

The demand for clawback VAT on vessels built between 1985 and 1992, should be, one would imagine, history by now. This is not the case.

 

For pre-1985 vessels, a regulation was introduced stipulating that these vessels would be deemed VAT-paid if, inter alia, they were lying in EU waters on 31^st December 1992. It is interesting to note that the directive was signed on 14^th December 1992 – hardly sufficient notice for owners of vessels lying in the Caribbean to return to Europe before the deadline. Only a few authorities assisted by providing official certification for qualifying vessels, the most notable being the British customs “Dover Yacht Team”. For others, proof of VAT-paid status was, and still is, difficult to prove.

 

Owners of vessels from 1985 to 1992 faced a different dilemma. Should they pay? If so, when and how much? The French authorities, aware of problems faced in the past from loss of revenue on yachts departing from marinas, declared an unofficial moratorium that continues to this day. Provided the owners and the principle users of these yachts did not change they would not be called upon to pay the VAT. Other states chose harsher methods by impounding yachts and fining their owners.

 

The historical background to these regulations is important to potential buyers of second hand yachts. Proof of VAT payment, and the quality of the documentation, could be of consequence regardless of the buyer’s involvement in the original VAT payment.

 

 

 VAT is not a proprietary or ownership tax. It is a tax on use or consumption. TI exists for the benefit of the bona fide non-EU resident users/owners of vessels who use their vessels privately for not more than a total of 6 months in a year. Any non-EU owned vessels chartered in EU waters are, therefore, legally obliged to pay VAT.

 

 

 Those parties not fortunate enough to benefit from TI, may find themselves paying as much as 25% VAT on a new superyacht.

 

There are legal ways of limiting the VAT charge.

 

Export: EU residents do not have to pay VAT on vessels they intend to export immediately from the EU. This should not be confused with TI

 

“Aged” vessels: Vessels that are not a new means of transportation, ie those that are more than three months old and have more than 100 hours of sail time, may be imported into the EU at an appropriate market value. This can be a complex area (see “Smuggling”, below).

 

Commercially-owned and/or used vessels: Vessels that are chartered and or owned as a business asset are entitled to the recovery of the VAT, as long as the owner is VAT registered. Leasing schemes offered by finance houses, particularly in France, and charter deferment programmes have tried to lesson the VAT for EU residents when acquiring a non-VAT-paid, or new, vessel. They must, however, be cautious and adhere to the relevant laws and practices in the state where the vessel will lie and/or be used.

 

Many yachtsmen forget the penalties, both financial and penal, that may result from smuggling.

 

Deliberate under-declaration of the value of a yacht can result in the declarant, and those who conspire to benefit from such declarations, being penalised.

 

Single accounting documents (SAD) and other proofs of VAT payments can arise where the value of the yacht bears little relationship to either the price paid or related market value. Authorities who issue such documents are impregnating the yachts documentation with a dangerous virus.

 

Buyers of yachts that are VAT-paid should be cautious of such documentation. It may well be rejected by authorities in other states, or other regions of the state where the documents have originated.

 

Fraudulent declarations can be reviewed up to 20 years after the event and penalties, or the seizure of the yacht, may be imposed on the current owner.

 

In summary, it is crucial that the mariner in EU waters has the relevant and legal documentation in place before attempting to navigate customs in the ports of the EU member states.