More VAT Trouble for the Superyacht Industry

A brief issued on 16 May 2011 by HM Revenue & Customs spelled the end of the so-called "fallback" provisions, under which an Isle of Man VAT registration could be used to account for and reclaim VAT on the purchase of a yacht built in the EU without the need for the yacht to travel to the Isle of Man. This 'fallback' provision comes to an end on 1 June 2011 after a judgement of the Court of Justice of the EU. 

The fallback provision came about through representations to HMRC made on behalf of owners of large yachts. Under the provision, a UK VAT registered business could purchase a yacht from a builder in, say Italy, move the yacht to, say France from where it would be chartered, and account for acquisition VAT in the Isle of Man, crucially without the need for the yacht to visit the Isle of Man. With the end of the provision, the yacht would now have to visit the Isle of Man.

These changes will most obviously affect superyachts built in the Mediterranean.  Superyachts built in Northern Europe such as the Netherlands and Germany would still have the option of sailing up the Irish Sea to the Isle of Man as a diversion on their maiden voyage to the Mediterranean—though that won’t be an attractive proposition in the rough seas of winter. The change thus could boost the appeal of jurisdictions like Malta that offer a competitive VAT regime for yacht registrations, and are conveniently located in the Mediterranean.

“This could be a bit of a blow to the competitiveness of the Isle of Man as a jurisdiction for the tax structuring of commercial superyachts,” said Duncan Bateson, Head of the Marine Team at TLT LLP solicitors. He adds, “The Isle of Man superyacht industry is working overtime on alternative arrangements to achieve a similar result, though that may well require the VAT to be paid in the destination country and a time lag before recovering the VAT.”

The fallback provision, combined with the possibility to pay and reclaim acquisition VAT simultaneously, has made the Isle of Man an attractive jurisdiction for commercial yachts built and operating in the EU, most typically in the Mediterranean.

Katherine Ellis of the Isle of Man-based trust and corporate service provider Equiom advises that they have alternative options for clients who may be impacted by these changes. “One option would be to include a structure involving an Isle of Man company having a VAT registration in the EU member state to which the yacht is to proceed in order to account for the intra-community supply,” Ellis says.

Ayuk Ntuiabane, Director of VAT Services at Moore Stephens Isle of Man, warns against a knee-jerk reaction. He advises they are in discussions with Isle of Man Customs & Excise to clarify the changes. “The need to sail to the UK (not necessarily the Isle of Man) is essentially a requirement to go the extra mile in order to recover VAT,” Ntuiabane says. “The measure does not affect the fundamental benefit of operating as a business from the Isle of Man, which includes the right of the VAT registered person to deduct or reclaim the VAT payable on the acquisition or importation of the yacht. For most clients, sailing to the UK or Isle of Man to prove their belonging there will be a relatively small price to pay.”

A VAT expert independent of the Isle of Man, Adrian Jones of BlackStar, points out that the changes will also affect the treatment of yachts imported into the EU through such countries as Malta for onward supply to Isle of Man. “There has always been a reluctance to recognise such fallback provisions in certain EU member states such as Spain,” Jones says. “My initial reading is that this will have a significant impact in the way transactions are structured as VAT will be due on the yacht's value unless it travels to Isle of Man. While I am sure that Isle of Man providers will be quick to find new and innovative solutions, I am equally sure that other jurisdictions will look to take advantage of these changes to market their own trust and corporate services.”  

Italy Asked To Comply With EU Vat Directive

Following the restriction of the French Commercial Exemption to yachts navigating on the high seas, the European Commission has formally asked Italy to amend its legislation to bring it into line with the rules on exemptions for ships laid down in the VAT Directive. The directive provides exemptions from VAT, under certain conditions, on supplies of goods for fuelling and provisioning vessels used for navigation on the high seas, and on the supply, modification, repair, maintenance, chartering and hiring of such vessels.  It remains to be seen whether this exemption has been applied to Italian commercial yachts and what affect it will have on the Italian superyacht industry.

DHG

Related Link:

HM Revenue & Customs Brief 20/11: Accounting for aquisition VAT on intra-EU supplies - changes to the 'fallback' provisions

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