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VAT problems when chartering in the EU

VAT is the one constant that has haunted the yachting community in the European Union (EU) for years. Owners have long relied on the tax advice of yacht managers, brokers, customs agents and captains.

To be fair, most owners have managed to sail unhindered, but the reality was that there was much illegal sailing, be it on import VAT, illegal chartering or misuse of VAT-free fuel. But they were getting away with it and because of that people drew the conclusion ‘we are doing it, no one is stopping us, it must be OK’.

With recent declarations from customs authorities on the amount of VAT they say is leaking from the system, plus the tightening of rules, the effective shutting down of imaginative leasing schemes, and a recent high profile VAT-linked yacht arrest, owners need to wake up to what they should be doing on VAT.

This is not necessarily a guide, but it should direct the yacht owner, manager or charter manager to seek clear tax and legal guidance.

The VAT problem

From a certain point of view the rules are simple: if you buy a yacht for your use and bring it into the EU you have to account for VAT in some way or other. At a basic level, you buy or you import into the EU, you pay VAT.

A yacht cannot be a little bit commercial and little bit private and operate in laissez faire way. There are strict rules. If a yacht looks private – lots of personal effects on board – and only the ultimate beneficial owner and his family directly or indirectly ever use it, the arrangement cannot benefit from tax advantages.

In the UK, the tax authorities use the phrase ‘earnestly pursued’ as a test for the operation of a valid yachting business for VAT purposes. That is, are you running a real chartering business or just going through the motions?

So what has precipitated the current tax hiatus? A significant minority of owners have or are perceived to have abused the system. Hundreds of millions of euros is potentially there for the taking in unpaid tax.

EU hunt for VAT dodgers

Customs authorities across the EU have been working together to prove that owners establish layers of sham companies which are used to charter their own yachts and are conducting investigations all over Europe, looking for the one person in the chain, from builder to captain to broker, who says the owner of a particular yacht is Mr or Ms X and not the company that is the registered owner. This is difficult to prove, but traps are being laid.

The current legal proceedings in Italy involving non-EU-flagged vessels are based on an alleged infringement of EU Custom Regulations and the lawfulness of the provision of yachting services in the EU. The tax authorities are disputing whether EU VAT-registered yachts flying, for example, UK overseas territories’ flags can continue to provide services in EU waters, contrary to what is permitted as a consequence of any associated VAT registration. They argue that if you have a non-EU flag you cannot operate legally in the EU and all the tax breaks fall away.

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