Selling any aircraft is a complex transaction! To help provide clarity to anyone involved in this process our Martyn Fiddler tax team have created a short series of articles explaining the VAT and Customs implications. Drawing upon their experiences from many years in practice our explain the most common do and don’ts for selling an aircraft.
Why is the territory the aircraft is sold in so important?
From a VAT perspective, EU and UK VAT law focusses on where an asset – in this case the aircraft – is sited at the point of sale. As VAT can be triggered by transactions, the location of the aircraft will determine which country’s VAT laws apply. For example, if the aircraft is in France at the time of the title transfer, then French VAT laws will apply to the sale, equally if the aircraft is to be sold while sited in the UK, UK VAT laws will apply.
From a Customs import status perspective, if the aircraft has been imported into UK or EU territory by the seller, it could face losing its import status when the title is transferred to another party. Consequently, the new owner must either re-import the aircraft (if it is to be used in the same territory again) or consider whether the Customs relief regime of Temporary Admission can be used instead.
Why does it matter which country’s VAT rules apply?
Firstly, some countries do not have VAT; the Channel Islands do not as they are not part of the UK for VAT purposes unlike the Isle of Man. Where the jurisdiction does not have such a tax system, the sale is potentially free from VAT and other tax obligations, although other local taxes or Customs requirements may still apply, for example the Island of Jersey has a Goods and Services Tax (GST) system. It is important to check such details thoroughly before finalising a jurisdiction to transact in.
Secondly, the jurisdiction chosen will not only affect whether VAT applies to the sale, but also whether the seller must register for VAT locally to account for that VAT. Having to register locally for VAT when the seller may not have any other activities in that territory can be both time-consuming and administratively burdensome. From the purchaser’s perspective, trying to reclaim VAT in a territory where they are not already established and VAT registered can prove difficult and slow which affects cash flow. Prior planning regarding sale location can help eliminate this headache from the transaction.
Registration for VAT is approached differently in various EU member states and jurisdictions. For example, where the sale is a one off transaction that is zero rated for VAT (such as a sale to an airline or “qualifying” AOC), some jurisdictions may permit the seller to apply to be exempted from registering for VAT on the basis that there is no VAT to account for, and the seller is not making any other “plus VAT” sales in that territory. Equally some jurisdictions or EU member states will insist on a VAT registration for the seller regardless of whether there is any VAT to pay or not. How long obtaining a VAT registration will take can vary significantly depending on the country of application.
Certain jurisdictions have special rules to permit VAT free sales under certain circumstances. In the UK it is possible to sell an aircraft VAT free providing it is in a UK Customs Warehouse without any requirement for the seller to register for VAT or to account for any VAT on the sale. This can also permit tax-free back-to-back sales, thus protecting all the sellers in the chain from any VAT consequences. However please be aware that some EU member states, for example, insist on an aircraft being formally exported from the jurisdiction prior to this, for Customs purposes.
In Switzerland it is possible to sell an aircraft VAT free in the local equivalent of the Customs regime known as Inward Processing. However, the Swiss tax rules require that this can only be done where there are actual works to be completed while the aircraft is in the Customs regime and checks are performed to ensure this is adhered to.
Who pays the VAT?
It is common for an Asset Purchase Agreement (APA) to specify that the vendor is only liable for tax implications associated with the use of the aircraft up to the time of sale. The purchaser on the other hand is liable for any tax (including VAT) due as a result of the sale itself and all taxes thereafter.
However, from the perspective of the UK and the EU tax authorities, the seller is always liable for ensuring that the correct VAT treatment is applied to the sale. Consequently – regardless of the terms of the APA – the tax authorities will almost always look to the seller for any VAT they deem payable, together with penalties and interest if applicable, not the purchaser.
That being said, despite the purchaser being made liable for any VAT issues according to the APA, it may not always be possible for the seller to pursue the purchaser for this tax after the sale, depending on the circumstances of the transaction. For example, one situation where this may occur could be where the sale is treated as VAT “zero rated” (or VAT “exempt with recovery”), for a VAT export sale.
Put simply, a VAT export sale is normally treated as effectively VAT free on the basis that such export sales are good for the economy and the local balance of trade. The basis of this favourable VAT treatment is therefore to encourage such sales. In order to be entitled to this VAT treatment, the sale must comply with certain rules created to ensure the goods do actually leave the jurisdiction and are not diverted to home use. Evidence of the export of the goods must be provided within a specific timeframe, and must comply with certain evidential and additional requirements related to who the customer can be and where the customer can receive the goods.
Any failure to comply with these rules will result in local VAT at the local standard rate being applied to the sale by default by the Tax authorities. In the UK, the current standard rate is 20% of the value of the asset and in the EU such rates vary from 17 – 27%.
Popular options worth considering for closing VAT free include: Guernsey, a UK Customs warehouse, or in a Swiss Inward Processing regime – where there are works or at least registration changes involved.
Tax clauses in contract
We often become involved in a sale and purchase late on in the process, and asked to analyse and assist with potential liabilities that might arise from a transaction that has already been set in motion. Difficulties can arise when what was envisaged at the time of signing the Asset Purchase Agreement (and the terms contained within it) are no longer sufficient to cover all tax bases at the time of closing the sale. This is particularly true when the parties have agreed a location for the closing of the sale which might now generate an unforeseen tax liability.
We would always recommend that parties talk to their tax advisors before finalizing the drafting of the Asset Purchase Agreement (APA). In all cases VAT and additional taxes must be considered carefully to ensure the intended consequences are reflected in the documentation. The allocation of the liability for any VAT on the sale should be clearly stated, although the seller should still be aware that any tax authority will look in first instance to the seller to account for the correct VAT, and will consequently assess the seller – not the buyer – for any tax adjudged incorrectly charged.
In addition to considering the VAT treatment and customs implications of a closing jurisdiction, the import status of the aircraft must also be considered. For example, if an aircraft has been UK or EU imported, the closing jurisdiction will usually determine whether the aircrafts current import status can be retained. Therefore, the decision process for a suitable closing jurisdiction will not just be determined by VAT and customs implications, but by the parties preferences regarding keeping the aircrafts import status.
When a closing jurisdiction has been chosen, it is important to consider any additional VAT risks that should be covered. For example, as already explained, there are various conditions to comply with to ensure no VAT is due on a VAT export sale. All steps to be taken and evidence to be provided by both parties should be clearly documented in the APA, ensuring all requirements are clearly understood.
Contracts should be drafted in a sufficiently broad way so that it can outline how both parties will work together to respond to any challenges to tax treatment by the relevant tax authorities.
What happens when it is AOG?
Very specific issues arise when an owner of an aircraft which becomes designated as AOG (this means ‘aircraft on the ground’ because a maintenance or other technical issue prevents the aircraft from flying) receives an unexpected offer for purchase.
From a tax and customs perspective, the sale of an AOG aircraft may prove problematic if the aircraft became AOG in an unfavourable sales jurisdiction. For example, the aircraft may have arrived in the jurisdiction under Temporary Admission (TA) and experienced technical difficulties subsequently that forced it to be grounded. In this case under Customs regulations the aircraft cannot be sold while it is under TA. Such a transaction may also cause the sale to be liable to VAT and the seller liable to VAT registration. In addition, if the aircraft arrived under TA it may not be able to be transferred into the Customs suspense regime of Inwards Processing (IP), meaning that VAT may be charged on all works and parts used for repairs. Where this involves high value parts such as engines this can of course be extremely expensive!
Martyn Fiddler have seen, on more than one occasion, aircraft which have been grounded in a Customs territory receive unexpected offers to purchase. These scenarios have caused significant complications due to difficulties transferring the aircraft to a different VAT jurisdiction for an optimum VAT free sale.
It’s important to note that in each situation above, the tax and customs difficulties were not as a result of the jurisdiction in which the seller or purchaser were based, or the registration of the aircraft. Just because one or both parties are outside the relevant territory does not matter from a VAT perspective, the only thing that matters is where the aircraft is based at the point of sale.
Another issue that can often be overlooked is the location of the title engines (meaning the engines specified in the transaction documents) at the point of sale. If, due to the AOG status, the title engines have been removed and are located elsewhere for repair, it will be crucial to ensure the sale of the title engines is considered when looking at the VAT treatment of the sale overall. In the same way that the VAT treatment of the sale of the airframe is based on where it is sited at the point of sale, so is the sale of the engines. Unless there are two separate sales, the title engines must be seen as sold at the same time as the airframe. Where the engines are physically sited elsewhere then the VAT implications for this must be taken into account.
Our strong recommendation is to always review the local tax and customs status of the aircraft (and any relevant parts) if there is an AOG event, and to take professional tax advice from someone who specializes in aviation. We would also advise keeping a copy of all territory import and other customs certification filed on board the aircraft in case a “temporary” AOG issue becomes a long-standing problem in future.
In conclusion, it is crucial to consider where the aircraft will be located when the transaction closes. It is in both parties’ best interests to ensure that the VAT export rules of the chosen closing jurisdiction are fully understood and the impact on both the seller and purchaser have been considered well in advance of finalising the APA and any other arrangements.
The steps required to meet the VAT export rules should be clearly agreed and preferably clarified in the APA. Details agreeing the approach required from both parties in the event of any challenge to the VAT treatment applied to the sale should also be documented.
Seeking professional tax advice helps mitigate risk by ensuring all factors are considered, and VAT and Customs implications and subsequent requirements are fully understood in advance, avoiding the risk of becoming compromised further down the line and ultimately saving you time, money and headaches.
Selling any aircraft is a complex transaction! To help provide clarity to anyone involved in this process our Martyn Fiddler tax team have created a short series of articles explaining the VAT and Customs implications. Drawing upon their experiences from many years in practice our explain the most common do and don’ts for selling an aircraft.
