The issue of Value Added Tax (VAT) or sales tax on aircraft being imported into the Europe Union is complex enough to support hundreds of experts. A fair number of these are on the Isle of Man which is now the subject of an investigation by the International Consortium of Investigative Journalists (ICIJ). The ICIJ is best known for breaking the Panama Papers last year.
The exact allegations are unclear. But the ICIJ is working with the UK’s Guardian newspaper, France’s Le Monde, German media, Japanese TV and the BBC’s Panorama programme. The Isle of Man says that journalists have been working on the story since February.
The government says that the ICIJ claims to have obtained documents from a law firm showing how buyers have been using the Isle of Man for abusive VAT avoidance. Offshore law firm Appleby Global has said that it has also been contacted by the ICIJ and says that some of its data was compromised in a security breach last year.
“Appleby has thoroughly and vigorously investigated the allegations and we are satisfied that there is no evidence of any wrongdoing, either on the part of ourselves or our clients,” said the law firm in a statement. “We refute any allegations which may suggest otherwise and we would be happy to cooperate fully with any legitimate and authorised investigation of the allegations by the appropriate and relevant authorities.”
The Isle of Man government says that it is not aware of any regulations being broken.
“Like all responsible members of the global community, we take allegations of this nature extremely seriously. The ICIJ has so far rejected our repeated requests to provide written evidence to support their claims,” says Howard Quayle, the chief minister of the Isle of Man. “During the course of our own ongoing review, we have found no evidence of wrongdoing or reason to believe that our Customs and Excise has been involved in the mistaken refunding of VAT.”
“We have asked HM Treasury to look at all elements involved in the process of the importation of business jets via the Isle of Man into the EU”
As well as arranging a special press conference (below) – which one local journalist described as “surreal” and which was paused halfway through to clarify details – the Isle of Man has asked the UK Treasury to assess its VAT treatment for aircraft. It has asked it to focus on aircraft leases.
“In light of the claims made by the ICIJ, we have asked HM Treasury to look at all elements involved in the process of the importation of business jets via the Isle of Man into the EU,” said Quayle.
Appleby has told Corporate Jet Investor that it has not been involved in advising clients on VAT since 2015 when it spun out its fiduciary business. The fiduciary business was rebranded as Estera after a management buyout backed by Bridgepoint Capital in December 2015.
“We would like to clarify that Appleby does not undertake VAT aircraft registration work. In fact, under the sale agreement of our fiduciary business to Estera, this was specifically reserved for Estera,” said the law firm.
A spokesman for Estera says that this is misleading. “It is wrong to suggest that Estera gives any advice on the importation of business jets. It is important to stress that Estera gives no advice whatsoever, legal, tax, structuring or otherwise to clients,” said the spokesman. “Estera requires all clients to obtain independent advice prior to the establishment of any aviation leasing structure. Estera expects the client to obtain assurances from its advisers that the structure is tax compliant and otherwise suitable to the client’s circumstances. We operate in close cooperation with our regulators and in line with all relevant regulations currently in force in the Isle of Man and other jurisdictions.”
VAT and aircraft
VAT was once seen as one of the easiest taxes to understand. But in the UK, it is ridiculously complicated. In the UK you pay VAT on biscuits but not on cakes. On crisps but not tortilla chips. An attempt to add VAT to hot Cornish Pasties in 2012 led to a government climb-down which was described as the “Omnishambles Budget.”
It is even more complicated for high-value assets that cross-borders. VAT is a key issue for anyone flying an aircraft into the European Union. Non-residents, like American companies that are visiting, can apply for temporary admission but this restricts how the aircraft can be flown (it cannot carry any EU residents, for example).
Anyone planning to base an aircraft in the EU needs to formally import the aircraft. This may involve paying VAT and custom duties. Until 2011, the UK also Zero-rated aircraft above 8000kg which included most business jets. The UK changed its rules at the request of the EU.
Most buyers of commercial aircraft, business jets or helicopters do not pay VAT. Many smaller aircraft are exempt and aircraft for airlines which use aircraft as business assets are Zero-rated.
In order to qualify for Zero-rating, HMRC set three rules under the 1994 Value Added Tax Act. First, aircraft must be operated by an airline; second it must operate for reward; and third it must operate chiefly on international routes. An airline like British Airways clearly meets these tests. The situation is less clear for business jets.
Business jets are also bought by a diverse group of customers – corporates, high net worth individuals and companies looking to make money from charter. Many entrepreneurs buy corporate jets for both business and pleasure. Clearly few buyers of business jets want to pay VAT. With business jets ranging between about $1 million (for a pre-owned one) and $70 million, the sums involved are sizeable. Each buyer is different and advisers and lawyers spend a lot of time analysing each transaction.
Buyers of business jets can also choose the country where they bring their aircraft into the EU. So a Hungarian buyer happy to pay VAT would be most likely to import through Luxembourg (with 17% VAT) rather than Hungary (27%). Until 2011 nearly every aircraft imported into the EU came in through the UK. The Isle of Man has been a popular entry point since then.
In 2010 when it became clear that the UK was looking to charge VAT, advisers began looking at whether business jets should also be exempt. At the most basic level the argument centres on how you define an airline. This is not simple and this involves definitions from both Air Navigation Orders and tax codes.
Because aircraft were typically brought in through the UK or another zero rated country, there is little case law available. The most important EU case was when the Finnish tax authority challenged an operator. The operator appealed. In 2012 the European Court of Justice’s Advocate General ruled that, even if an aircraft was used principally by the shareholder, so long as it was also available to the airline for use for other commercial flights, the supply on importation of the aircraft could still be zero-rated.
This makes sense. A business jet that is chartered out fully is very similar to aircraft owned by an airline. It would meet all three rules so should be fully exempt (as it is a revenue generating tool).
However – as with most VAT issues – defining exactly what an airline is, is complex. It took a VAT Tribunal case in 1991 to determine if Jaffa Cakes – a popular biscuit sized snack in the UK – were a biscuit (so eligible for VAT) or a cake. Defining whether an aircraft is being used by an airline is much more complex. Unlike jaffa cakes, each transaction is also very different.
There are also differences between how Air Navigation Orders – which govern aircraft registration – define an airline (or Aircraft Operating Certificate holder) and ones used by HMRC.
Some Air Navigation Orders – like the UK and Isle of Man which are similar – allow for an aircraft within a corporate group to charge for use of that aircraft by companies within the group. (The definition of a corporate group set out in the Air Navigation Order is also normally quite narrow.) These typically say that this form of aircraft use/payment within a corporate group is not considered to be commercial and therefore does require an Aircraft Operator’s Certificate so the aircraft can be registered on a private registry like the Isle of Man.
But because the aircraft use and operation within the group of companies could generate a profit, the aircraft owning company within the group could be classified as commercial and therefore eligible for a VAT registration. This is why it is possible for a aircraft to be registered on the Isle of Man as a private aircraft and still be Zero-rated.
It is these small differences in language that can have a big impact on understanding the structure.
Things are more complicated when the ultimate buyer is a high net worth individual. If they make their aircraft available for charter when they are not using it, there is an argument that should it be treated like an airline (so Zero-rated). If they do not charter it, the aircraft should be treated as being owned by an individual with VAT paid. In this case, an owner may choose to import via Luxembourg and pay VAT or use another jurisdiction like Malta that offers an alternative leasing scheme.
Many buyers choose to use a company with an Aircraft Operator’s Certificate to manage their aircraft and these also import aircraft. These companies, which manage aircraft for profit, also look a lot like airlines from a tax perspective. But high-net worth buyers may still need to pay VAT.
The Isle of Man steps in
In May 2007 the Isle of Man launched an aircraft registry for privately owned business jets. The island’s government did not expect to make profit from the registry, instead it saw it as a way of bring business to the island’s lawyers, trust companies and professional advisers.
The success of the registry surprised everyone (and has since been copied by Guernsey and Jersey). It had registered 957 aircraft in May 2017. Although it is run by a government department, it was keen to grow its business and provided fantastic customer service. When the UK started charging VAT on business jets, the Isle of Man’s Custom & Excise Division was open to talking to advisers (it is worth stressing that aircraft have never had to be registered in the Isle of Man to be imported through it).
The Isle of Man is a Crown Dependency – the Queen is Lord of Mann – and is politically and constitutionally separate from the UK. However, the Isle of Man is part of the UK’s custom area – which means it is also in the EU Customs area (at least until the UK leaves the EU).
Customs – including VAT – is managed by the Isle of Man Treasury’s Custom & Excise Division with the government working closely with the Her Majesty’s Revenue & Customs (HMRC) in the UK. They hold quarterly governance meetings on a range of VAT issues and many of the staff used to work for HMRC in the UK.
“Customs use exactly the same rulebook as the UK and apply it in exactly the same way,” says a senior manager at an Isle of Man trust company. “They also want to see content and proof at the start and then track you. If your VAT returns do not reflect what you said it is clear that they come after you.”
Customs officers in the Isle of Man apply the same rules as HMRC, but the biggest difference is the level of guidance they are prepared to give aircraft buyers and their advisers. HMRC in the UK will refer anyone importing an aircraft to their regulations. Officers in the Isle of Man have sat and worked with importers to determine structures are in line. They did not hide this and encouraged people to meet with them and discussed issues at conferences.
“The Isle of Man is more business friendly but just as strict”
“In the UK they say ‘these are the rules’ and if you meet them it is no problem,” says the manager. “But if you got it wrong we will clobber you. The Isle of Man is more business friendly but just as strict.”
It is this customer service and level of certainty that has made the Isle of Man an attractive place to import aircraft rather than any loophole.
One reason that the Isle of Man has worked closely with the UK is that in 2010, HMRC did intervene and shut down a leasing scheme that was used to import yachts into the European Union. This was embarrassing for the island and customs officers have been keen to avoid this happening with aircraft imports.
“The VAT treatment of the importation of aircraft into the EU is a highly technical and complex area in which the Isle of Man follows the same policy, laws and rules as the United Kingdom,” said chief minister Quayle.
The government says that some 262 aircraft structures are still live (where aircraft have not been sold or exported) – lower than some business jet specialists thought. The Isle of Man Treasury’s Custom & Excise Division says it has already audited 33 of these aircraft for VAT and is now working on another 13 aircraft. It says that since 2011 it has raised more than 30 assessments for under-declared or over-declared VAT worth £4.7 million.
“One thing worth stressing is that Customs have got stricter every year,” says the Isle of Man trust company manager. “It has never been a free-for-all, but, working with the UK HMRC, they have become stricter each year.”
However, as with all jurisdictions there have been rumours of some advisers pushing structures or perhaps not supplying all relevant information to tax officials. “I was asked to check a structure for a client and was told it was confidential,” says one London tax partner. “That is a definite red flag and unheard of, I have been refusing to work with some advisers for a while now.”
The Isle of Man is not alone on this. Lawyers have concerns about other EU jurisdictions and have been warning that VAT on aircraft is likely to become an issue for several years. The same concerns also apply to some superyacht imports in other jurisdictions which still have leasing schemes. “I am surprised it has taken this long,” says one US lawyer.
Isle of Man and Appleby break the story
It is easy to see why ultra-high net worth individuals not paying taxes on business jets is an emotive issue. The government is clearly worried.
“You are not dealing with a local newspaper here,” said Quayle (to a press conference attended by journalists from several local newspapers). “These are international investigative journalists and they are going to do an expose of their alleged evidence and you have two options, you put your head in the sand and you ignore the problem and you let it happen or you comment on it.”
As well as the press conference he has also been interviewed by the BBC’s Panorama programme. It is not clear when it will be broadcast.
Quayle and the Isle of Man have chosen to respond before the publication or broadcast of any allegations. He says that they have taken “pre-emptive action” and are worried about international negative publicity.
“Even if the allegations are baseless this is bad news,” says one Douglas aviation lawyer.
Quayle is right when he says that this is a complex area. He also says that it is one where they believe the ICIJ could be mistaken.
Appleby also argues that the ICIJ may not understand everything. “We are disappointed that the media may choose to use information which could have emanated from material obtained illegally and that this may result in exposing innocent parties to data protection breaches,” said the firm. “Having researched the ICIJ’s allegations we believe they are unfounded and based on a lack of understanding of the legitimate and lawful structures used in the offshore sector.”
Whatever happens next, you can guarantee that it will not be simple. Importing aircraft is more complicated than warming Cornish Pasties.
Updated on November 1 following statements from Appleby and Estera