VAT and yachts
HMRC have clarified their view of the VAT treatment applying to the purchase and use of pleasure craft and, in particular, the chartering and leasing of pleasure craft (including yachts). This clarification arises in the context of VAT schemes through which private individuals incur little or no VAT on the purchase of pleasure craft.
If HMRC conclude that a structure meets the tests for an ‘abusive practice’ they will consider appropriate action to restore the situation that would have existed in the absence of the abusive transactions. This might include issuing assessments to disallow input tax and/or deregistration of the entity concerned. Such assessments might also give rise to interest charges and penalties.
The existence of one or more of the following features might indicate an abusive structure (the list is not exhaustive – the indicators are illustrative of the points that HMRC say they might take into account, together with others):
- The main user of a pleasure craft is the ultimate owner of the chartering or leasing entity.
- The main user of a pleasure craft funded the purchase of the vessel (directly or indirectly).
- The person who funded the purchase of a pleasure craft (directly or indirectly) uses the vessel for prolonged periods in the peak chartering season.
- The chartering of a pleasure craft to third parties would not, alone, be of sufficient continuity and substance to comprise an economic activity.
- The chartering or leasing entity shows significant ongoing losses in its financial statements.
- Charter fees or lease instalments due from the main user of a pleasure craft are paper transactions only (for example being offset against loans).
- Charter fees or lease instalments are below open market value.
- The terms of a lease differ significantly from normal commercial practice (for example, the duration of the lease is unusually long).