Chartering, Management & Reclaiming VAT

Chartering, Management & Reclaiming VAT

With UK Value Added Tax (VAT) standing at 20% there is obviously a major attraction to any scheme that may allow VAT to be reclaimed – VAT is of course a compulsory tax imposed, albeit at different rates, throughout the European Union and hence upon any vessels that may be used within EU waters. To reclaim VAT it is necessary to shown that the purchased vessel will be used for commercial purposes such as offering a vessel out for charter to third parties. By so doing, a trading business is in effect in place, which means that all sums paid out upon which VAT is charged can be reclaimed, including of course the purchase of a motor boat, together with all day to day expenses such as food, advertising, maintenance etc. The ‘vehicle’ almost always used to carry out such commercial activities is a limited liability company since it affords personal liability protection, emphasises the business aspect and generally supports a veracity to the whole enterprise.

The ‘benefits-in-kind’ Questions

To avoid a claim by HMRC, or any other applicable fiscal authority, that the owners are enjoying a taxable ‘benefit-in-kind’ through for example having the right to enjoy the vessel at preferential rates or perhaps no cost at all, it vital that a proper and independent management and control system has been put in place. This emphasis has been particularly stressed in recent years as many tax and customs authorities have become extra vigilant where companies have bought vessels for ‘client’ entertainment only finding that the entertainment was primarily made available to company directors and their families!

Where should I register my boat?

Provided you have no objection to paying, for example, standard UK corporate taxes then – especially if your vessel will be used in the United Kingdom – you need only register your vessel with the UK Shipping Registry and just make sure that your accountant gives good advice on how to avoid the ‘benefit-in-kind’ issues highlighted above. However, given that the vast majority of vessels will be based in the Mediterranean with the majority of charter clients coming from countries such as the UK, Germany, Ireland, the Netherlands etc. it starts to become economically questionable to base the ‘operating’ company in a relatively high tax zone like the UK given the advantages that can be had elsewhere.

The Isle of Man is probably the most desirable location for those wishing to register their Charter business since unlike Jersey, Guernsey and the British Virgin Islands, the Isle of Man is part of the UK for VAT purposes (see protocol 3 of the Treaty of Rome) but not part of it for general administrative or corporate tax purposes. In fact, the Isle of Man is an autonomous Crown Protectorate with its own 1,000-year-old Parliament called the Twynald based in the capital city of Douglas and further is not a constituent part of the European Union. It should also be noted that since 2006 the local government has sought to emulate their Celtic cousins across the sea in Ireland and adopt a universal corporate tax rate both for indigenous and non-resident companies of not the Irish 12.5% but a Zero Corporate Tax Rate save for banking and financial companies liable to the higher corporate tax rate of 10%! For those wishing to use an alternative jurisdiction or not wishing to change an existing holding company based elsewhere (such as in the highly competitive British Virgin Islands) it is still possible to register a branch in the Isle of Man and register the branch for VAT and garner all the aforementioned benefits.

The need for genuine management & control

Once the Isle of Man has been selected to register both your vessel and charter business it is paramount to put in place genuine management and control based in the Isle of Man if there is not to be a ‘boomerang’ effect back to the higher tax zones such as the UK or perhaps vessel location in the Mediterranean. With this in mind the SCF Group can set up a fully managed structure in the Isle of Man, register your vessel and even obtain all the necessary licenses to offer charters, take client booking etc. all at incredibly reasonable rates.

Other Tax issues – separating ownership

The SCF Group is of course a licensed tax-planning firm and prides itself on its ability to view a client’s needs holistically and not myopically. In no area is this approach more important than where individuals have built up considerable wealth and may want to consider any capital gains, inheritance or wealth tax implications that may arise from purchasing a vessel be it for charter or not – In fact, many clients request the use of nominee directors and secretaries to afford some degree of financial confidentiality from prying 3rd party eyes. Others, perhaps viewing their overall financial situation may want to insert in an overhead trust or Liechtenstein private interest foundation (stiftung) as they are in effect self-owing entities and can avoid many tax problems not only for the person who instructs their creation but also for any intended beneficiaries such as sons or daughters and/or perhaps to protect assets against potential future divorces. In particular, British fiscal residents should consider using an overhead Liechtenstein, Jersey or other private interest foundation since there is case law that establishes that these will be treated as being equivalent to limited companies and not trusts which circumvents most if not all UK trust anti-avoidance legislation. For more information, please refer to our Trusts and Foundations section.

If you would like further information on Yacht and Motor Boat registration please contact an SCF Consultant.