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VAT and All That

April 1, 2011

by Sue Grant

VAT in the Yacht Market

Now that the squeeze is on, VAT is becoming a bigger issue Europe wide. The VAT deferment schemes that have been in operation based out of the Isle of Man and elsewhere have a stop on them and the idea that you can own a yacht through a VAT registered company and reclaim VAT on the costs of the yacht, whilst doing a couple of charters through friends is well and truly dead. In order to do this, you have to have a really proper business, chartering to third parties and the Revenue Authorities do not look kindly on people who play at the business to reduce costs, avoid VAT and get cheap yachting. Those that believe that by staying a step ahead of the game by employing a sharp accountant are seriously behind the curve as the Revenue Authorities are now taking a seriously close look at yachting.

We have seen that the various cross border lease arrangements that were in place in the 90s and beyond (and which we countenanced against at the time) have been proven to be illegal and we have dealt with a number of yacht sales this year where the paperwork supplied at the end of the lease period was not acceptable and VAT has had to be paid in full less any VAT that was paid (normally a nominal amount) as the account was closed. In addition, UK owners should be aware that whilst leasing is still in operation in France and Italy and this is perfectly legal, that UK yacht owners on these schemes may not bring their yachts back to the UK without attracting payment of VAT in full. You have again been warned!

No escaping VAT in the EU…

Because of this changing landscape, it is the case that those EU owners purchasing non VAT paid yachts (either new, or brokerage yachts that have not accounted for VAT) where they plan to use them in the EU, really do not have an option other than to pay the VAT. Across the board from speedboat to superyacht, owners are taking a deep breath and paying the VAT so that the yacht is free from challenge in the EU. Of course the Malta leasing scheme is still in operation but this is probably the only current safe option open to EU yacht owners, but this is no reason to believe it will always be thus. Beware of advisers who tell you that there is a clever way around the VAT, there isn’t unless you are purchasing a yacht to use her commercially for charter and this is a proper business. You should check with your accountant carefully that you are not transgressing any benefit in kind rules if you are going to use her yourself privately. Mediterranean authorities are now spot boarding yachts asking to see log book entries, signed charter contracts and proof of prior payment of the charter fee.

VAT-paid brokerage yachts are at a premium…

All this means that we are seeing a premium price for yachts which have accounted for VAT on the brokerage market which is a new phenomenon. Up until now, it was assumed that over circa £800,000 a yacht would not be VAT paid and therefore VAT payment had no real value. This has now changed significantly. Of course in a market where there are so many non-EU buyers, there is a good chance that the yacht will be purchased by a non-EU national, but even here many non EU buyers prefer to buy a VAT paid yacht and keep a EU flag which enables them total freedom to sail in Europe without challenge. A note of caution to non-EU buyers – whilst a yacht retains her VAT paid status if her flag is changed to your national register, and if she is bought and sold in the EU, some EU Revenue Authorities are not recognising VAT paid status when the yacht then sells from you if the yacht has a non-EU flag to a third party in the EU. Therefore, if changing flag, it is wise to sell her only when the flag has been changed back to EU first.

Proof of VAT payment a real problem…

There is another significant problem with VAT, with which we have been wrestling over the past year and which we predict is going to become more of a problem as time passes – proof of VAT payment… Gone are the days when Customs Authorities would issue letters or certificates stating that a yacht was VAT paid. Because all EU Customs Authorities are acting on their own and are interpreting the rules differently, they have neither the time nor mandate to issue rulings that might be used in different member states. They have had problems where their rulings resulting in claims for compensation have been challenged in other member states so they will not repeat the exercise in the future.

Yachtsmen across the board have been very casual about keeping the VAT receipts for their yachts and of course until recently, this wasn’t such a problem. This has now changed and it has become a major issue. In many cases the original VAT receipt issued may not show a VAT number or invoice number or may have some other sort of error or omission, particularly when the yacht was manufactured or distributed by a small company. We normally find that this being the case the company in question is now out of business or no longer holds any records (they are only obliged to keep them for 7 years). In other cases the owner has no VAT receipt and probably bought the yacht without one. Alternatively, he may have a copy which is accepted by the UK Revenue and Customs Authority but which may not be accepted by a finance house.

There are also swathes of other yachts which were manufactured prior to 1985 and if in the EU on 31 December 1993 at midnight are exempt of VAT under the terms of the relevant directive. Finding proof of their location all that time ago is now very, very difficult. The ports where they were moored no longer have records and over the mists of time, a lot of owners have lost whatever proof they ever had.

Responsibility for VAT status is being pushed towards new owners…

We are therefore faced with transacting a number of yachts where the VAT status is grey. The finance houses are now extremely tough on the proof that they require in order to lend and if they aren’t 110% happy with the VAT paperwork, the buyer will be asked to sign a disclaimer agreeing that he takes responsibility for the VAT status of the yacht, if there is a problem later on. It is fair to say, that at times they are tougher than the UK Revenue authorities who, take a common sense attitude to the situation and who do their best to make a horrible situation at least a little more bearable. However of course, they do not speak for the other member states’ Revenue Authorities.

Yacht purchasers are therefore being put in a situation where they are taking onboard an element of risk at purchase where the VAT status is grey. This is a shame because the evidence that is normally available shows that the yacht must have paid VAT, it is just that it is not in a form that is acceptable today. Often, in such cases, the UK Revenue Authorities will make a ruling stating that they have no interest in the yacht and this is extremely helpful to us.

Non-VAT paid yachts will become less welcome in the EU…

In the UK it has always been the case that a yacht must account for VAT before she can be offered for sale. For many years we have managed this by paying the VAT ourselves and keeping the yacht on our balance sheet until sale, when we either return the VAT to the revenue on behalf of the purchaser or we export the yacht to a third country if she is selling to a non-EU national or is leaving the Community. Elsewhere in the EU there has been a much more relaxed approach to non-VAT paid yachts being offered for sale, on the basis that brokers would handle the necessary VAT payment or export on sale. This is now changing and we predict that non-VAT paid yachts will become less and less welcome in the EU over the next period. The various Revenue Authorities are tightening up seriously and lobbying for yachtsmen who would prefer to defer or avoid VAT is unlikely to have political appeal on any level whatsoever, in today’s straightened times.

Common sense rules…

Our advice, given all these problems is to maintain a common sense attitude to the subject but to be aware of the risks. At the moment the grey areas are remaining just that but if the various Revenue Authorities in the EU choose to devote more resource to collecting VAT on yachts, then expect to cough up. If you have a yacht on cross border lease (either paid off or still in process), take immediate steps to normalise the situation – this may well involve paying all the VAT. If you have your yacht in a VAT registered company – be absolutely sure that this is a proper commercial concern. If you have no VAT paperwork on your yacht, you will need to turn detective and see what can be found. If not, the price of your yacht will be compromised as her new owner will have to take onboard that risk. If you have only sketchy paperwork, see if this can be improved upon and act now – the manufacturer or distributor should be able to help, but may not hold the necessary records if you leave it until later and then you will have to discount the price of your yacht for your buyer to take on this element of risk.

by Sue Grant

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