Claiming VAT on business jets is legitimate and widespread, say lawyers


Challenger 605 G-LCDH

The recent revelations about private jet owners avoiding VAT payments by importing their aircraft into the EU through the Isle of Man have received a lukewarm response from the business aviation industry.

More than 13 million files related to shell companies in offshore tax jurisdictions were leaked from law firm Appleby to the German newspaper Süddeutsche Zeitung, which then enlisted the help of the International Consortium of Investigative Journalists to research the documents, nicknamed the Paradise Papers.

In the UK, the Guardian newspaper and the BBC’s Panorama programme have covered the Paradise Papers’ contents extensively over the past few days, including allegations that, in 2013, Formula One world champion Lewis Hamilton used shell companies in the British Virgin Islands, the Isle of Man and Guernsey to avoid paying £3.3 million ($4.3 million) tax on a £16.5 million Bombardier Challenger 605 jet (pictured).

The Isle of Man government subsequently asked the Treasury to assess its practice for the importation of business jets into the EU through the island. HMRC officials arrived on the island yesterday to begin reviewing the 231 VAT refunds totalling £790 million that have been issued to private jet owners by Manx customs since 2011.

But aviation and tax lawyers have told Corporate Jet Investor that there was nothing illegal about what Hamilton did, and that lawmakers are to blame for creating a system that is complicated and open to misinterpretation. They have also criticised the media for publishing “highly confidential” information that should not be in the public domain.

Under government tax rules, individuals and companies are entitled to reclaim VAT on purchases and running costs of private jets if they are used for business purposes. According to the Paradise Papers, Hamilton used the aircraft to travel between Formula One races and also for personal holidays. Hamilton has said the arrangement was reviewed by a senior lawyer, who told him it was lawful.

James Quarmby, a partner at Stephenson Harwood, said travelling between races was a legitimate business use and Hamilton had done nothing wrong by reclaiming the VAT on his jet. The problem was with VAT law, which was very complicated and seen by most people as tax avoidance.

“The Isle of Man uses the UK’s VAT rules so, if you don’t like the rules in the IoM, you have to change the rules in the UK. You also have to look at the rules Europe wide – VAT is a complicated tax created by European bureaucrats that is applied more or less uniformly across Europe. Lewis Hamilton has just taken advantage of those rules in a legal way,” he said.

“I could have predicted exactly what was in the Panorama programme word for word – none of it surprises me. The story’s got legs because it involves someone rich and famous, which makes it delicious for the press, but the fact is that what Lewis Hamilton has done is lawful and what everyone else does. It’s a private jet and he’s had personal use [of it] but he’s still using it for business purposes – moving him around the world to compete in F1 races. It’s such an unexciting story.”

Quarmby did not think VAT law would change as a result of the Paradise Papers allegations, because the tax gap in the UK was too slim. “There’s a lot of noise at the moment but it will all blow over. All I see is some cosmetic changes made for political purposes, although I don’t know what they will be. I don’t see, in relation to private jets, much changing apart from pressure on the IoM to be more strict in applying the VAT rules.”

And chartered tax adviser Mark Davies, MD of Mark Davies & Associates, put the blame squarely on the law. He told Corporate Jet Investor: “Tax avoidance, although it might seem morally wrong for a wealthy person to make the choice to take steps to pay less tax, is not illegal. The problem here is not the wealthy person, it is the fact that the law enables him or her to make that choice. It is the lawmakers – parliament – that are to blame. Paying tax should not be a charitable activity or a moral obligation, it should be clearly and simply defined as a legal obligation.”

He criticised the Panorama programme for “lumping together” practices that are “legitimate and widespread”, such as reclaiming VAT on a private jet that is used for business purposes, and illegal tax evasion, such as people being made advisers to companies that they own.

“There is only tax avoidance when there is a choice,” he added. “You can choose to avoid tax because there are different ways you can do it. That’s down to the lawmakers. The problem you have is you only have short-term strategy in government – the Chancellor of the Exchequer is only looking at this year’s budget, not five or ten years’ time. There is no concept of wholesale simplification of the tax system to make it easier to tax people. The more complicated you make it, the easier it is to try to avoid paying tax.”

But Aoife O’Sullivan, a partner at The Air Law Firm, said tax law was clear and easy to understand. “I don’t think it’s that complicated – if the aircraft is used for business purposes, you can claim the VAT back. I don’t think the law needs to change – it’s perfectly clear, and a very important protection for business.”

Claiming VAT back on corporate jets was “perfectly normal” and widespread. They weren’t used as luxury toys but were legitimate business tools that companies and individuals were entitled to claim back tax on. Hamilton used his jet to get to his job of competing in Formula One races.

She added that “questions need to be asked” about how the highly confidential information contained in the documents had been put into the public domain. “It’s a breach of confidentiality and is categorically wrong,” she said. “Questions have to be asked about how [journalists] got the information – it has to be investigated.”

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