The taxman cometh (for business aviation)

opinion

by Alasdair Whyte

November 4, 2024

Business aviation on both sides of the Atlantic is attracting the taxman's interest.

Governments around the world are trying to pluck business aviation.

More than 350 years ago, Jean-Baptiste Colbert, France’s finance minister, said: “The art of taxation consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.”

In February, the US Internal Revenue Service (IRS) announced plans to start audits on dozens (its figure) of business aircraft that are also used for personal flights. It said that these audits will be focused on aircraft used by large corporations, large partnerships and high-income taxpayers.

Deductions are allowed for aircraft expenses, provided that the aircraft is used for business purposes. However, if the aircraft is also used for non-work flights it can affect the company’s right to deduct some costs. Even the IRS says that record-keeping can be challenging.

There does seem to have been an increase in audits since then, but because audits typically take at least 12 months, it is too early to say if the IRS has found any mistakes. Tax specialists say that there has also been an increase in state tax audits for aircraft.

Canada introduced a luxury tax on aircraft, boats and high-end cars in September 2022. This only really came into effect in October 2023 for new aircraft because of order backlogs. But brokers say they have definitely seen Canadian customers back away from aircraft because of it and these are just the ones they were already talking to.

Last month, Michel Barnier, the French prime minister, proposed a tax of up to €3,000 per flight. If this comes into effect (it may not) it could increase the cost of business aviation flights by between 20% and as much as 50%. The European Business Aviation Association (EBAA) and EBAA France have pushed back hard against this.

On Wednesday, the UK government announced that it is increasing air passenger duty on all flights. This is a per-passenger tax that airlines and operators calculate and pay. The government is raising it by about £2 ($2.60) per passenger on a short-haul flight. But Rachel Reeves, the UK chancellor, singled out business jets.

This allowed her to make a joke about Rishi Sunak, the former prime minister. Labour criticised Sunak for using business jets when in office. He is also rumoured to be moving back to Silicon Valley to work for a tech company.

Reeves said: “I am taking a different approach when it comes to private jets, increasing the rate of air passenger duty by a further 50%. That is equivalent to £450 per passenger for a private jet to, say, California.

While this attracted laughter, it is worth noting that the new prime minister and his team have already been embracing business jets since taking over in June.

The British Business General Aviation Association (BBGA) has requested an urgent meeting with the aviation minister to “seek acknowledgement that business and general aviation is a recognised growth enabler for UK GDP”.

It is also concerned that on the same day as the budget was announced the government proposed lowering the size of aircraft that it affects to King Airs and most light jets. “Such a proposal would be a major deterrent to business, coupled with all other post-Brexit regulations and costs our industry is facing, including a 90% hike in Border Force charges,” said the association.

The UK rise, which will definitely come into effect for jets, works out at about $130 per passenger for shorter flights to mainland Europe and $1,500 for a long-haul flight.

“Candidly, while the budget means very marginal price increases for our clients, the other tax increases such as National Insurance, capital gains tax and private school fees are likely to be of far greater concern to UHNWIs,” says Toby Edwards, co-CEO of charter broker Victor.

This is a valid point. Taxes targeting flights are typically part of larger measures aimed at rich individuals and corporates. France is trying to find €60bn in savings and tax rises for its next tax year. The UK budget saw a £40bn increase in taxes. The biggest risk to business aviation is an economic downturn.

While no one welcomes paying more tax, the industry can also use taxes to demonstrate to critics that it pays its way.

But governments should not get carried away. A cooked goose does not lay eggs and a plucked goose can always migrate.